The nonprofit budget . . . it can be tricky for grant writers and nonprofit leaders, partly because it requires good forecasting skills and excellent bookkeeping systems and partly because there’s just a lot of confusion surrounding the budget.
Every nonprofit blog out there and every charity watchdog has something to say about how much of a nonprofit budget should go to salaries or programs or fundraising expenses, how much should come from donations or grants or program fees.
I understand the impulse here. Donors and grantmakers want to know that their money is going to an organization that is financially healthy and stable.
But, too often the advice you hear is an oversimplification.
Every nonprofit is different. The needs of a food bank are different from a community & economic development organization and from a performing arts nonprofit.
And that’s not to mention how common measurements of financial health, like percentage of budget going to programs for example, are impacted by inconsistencies in reporting.
How one organization categorizes program expenses on their 990 could be totally different from another.
So where does this leave us?
Let’s explore the nonprofit budget and some of the most common metrics, the widely accepted targets, and where the wiggle room is.
How much of my expenses should be salaries and other administrative costs?
This question is the one that people tend to get most hung up on; there’s been so much buzz around nonprofit overhead.
The Better Business Bureau says that no more than 35% of a nonprofit’s budget should be spent on overhead. CharityWatch and Charity Navigator also award higher ratings to nonprofits that spend less on overhead.
What’s important to keep in mind is that portions of your staff’s salaries can probably be allocated to program expenses. For example, imagine you’re the executive director of an organization that runs an afterschool program. And every day Monday-Friday, you are at the program from 3-5 pm. That means that you’re spending 10 hours, or 25% of your 40 hour work week at the program. So 25% of your salary can be allocated to program costs.
So yes, a general rule of thumb is that a higher proportion of a nonprofit’s budget should go to program expenses. But remember that not all salary costs count as overhead.
How much of my expenses should be fundraising costs?
Like the salaries/overhead question, this one is also often oversimplified.
The widely accepted metric is 15% or less of a nonprofit’s budget should be spent on fundraising costs.
CharityNavigator also assesses nonprofits on “fundraising efficiency.” This is a calculation of how much money it costs a nonprofit to raise $1. They acknowledge that different types of organizations will have different goals here, but in general they say it should cost between 3 cents and 20 cents to raise a dollar.
What these measurements don’t take into account is that it takes time to scale a good fundraising program. The wisdom that you have to spend money to make money definitely applies.
For example, if you’re looking to scale your programs, you need to scale your fundraising efforts. This might mean hiring a grant writer or development coordinator. The upfront investment in their salary could be $40k. In their first year, as they build new fundraising programs, the return on that investment might be $100k. That’s much higher than the recommended 20 cents to raise a dollar.
But the next year, as your team develops better and better relationships with your donor base and hosts bigger and better fundraising events, your income from fundraising might jump to $500k, which puts you at 8 cents to raise a dollar–a much better fundraising efficiency score.
It takes time.
What percentage of revenue should come from fundraising, grants, and other sources?
I bet you can tell how I’m going to answer this question, too: it depends!
But there is one rule of thumb that I want every nonprofit to keep in mind.
Diversify, diversify, diversify.
So many new nonprofits rely on small, sporadic individual donations and fundraising events (that could get canceled at any time due to health concerns).
Or once they develop a good relationship with a grantmaker, they count on that grant to be renewed year after year and don’t search for new opportunities.
And don’t forget that just because your organization is a nonprofit doesn’t mean that you can’t charge a fee for any of your services. In some cases, this can even help strengthen program participation. (People are more likely to take advantage of a resource or a service if they’ve made a financial investment in it.)
Take stock of your nonprofit budget and set your own goals
Spend a half hour or an hour today or block off some time on your calendar to assess your budget.
- What percentage of your expenses are overhead? Programs? Fundraising expenses?
- Where does your revenue come from? What percentage comes from grants? And from what grantmakers? What about individual donations? What’s the breakdown of recurring and one-off donations?
And then set a goal. Keep in mind industry expectations and your organization’s unique situation. How could you improve your fundraising efficiency? Are there changes you can make in how you categorize your expenses? (For example, are you lumping all staff salaries into overhead? Can some of that be included in program expenses?)
I won’t sugar coat it–this is confusing stuff when you’re new to budgeting! And we didn’t even get into how to write the budget.
If you’re ready to take control of your organization’s grant budgets, check out Grant Writing Made Easy. Module 5 is all about budgets. There’s also a bonus video in the course with my friend Stephanie Skyrzowski, who is a nonprofit fractional CFO. (She really knows what she’s talking about.)
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