There Are No Operating Expenses: Raise More Money With 5 Steps to Better Budgeting
paved road between trees in autumn colors
Autumn is my favorite time of year. Leaves are falling, mornings are crisp, the kids are in school, and pumpkin spice is back on the menu. But most of all, I love this time of year because it is – you guessed it! – nonprofit budgeting season.
Yes, you read me right. As an English major who loves to write and fundraise and who isn’t all that wild about math, I love budgeting. The way that a nonprofit creates and communicates its organizational budget has an enormous impact on its ability to raise money. And more money is more mission, right? That’s why I love it. (Insert a soothing sip of pumpkin spice latte here.)
Most nonprofits approach budgeting with the question: What expenses will we incur next year? Departments create their expense budgets and send them up the chain of command, the executive team wrangles and slices and chooses and compiles the numbers into a kitchen sink document, the fundraising team fills in their projections for income which will (hopefully) cover expenses, the CPA organizes the expenses according to the chart of accounts and tax requirements, and the board reviews and provides feedback and eventually approves it. Done!
Sound familiar?
All of those steps are necessary. But nonprofits frequently fail to consider the most crucial budgeting question of all:
How will our expenses drive impact?
We hear a lot of talk about “overhead” or “administrative” expenses. Based on arbitrary categories on tax forms, organizations like Charity Navigator have done incalculable damage to our sector by promoting the idea that there are some expenses in your budget that are “program expenses” and other expenses that are not.
This has no basis in reality. Anyone who works in the nonprofit sector knows that all the work that a nonprofit does is in service of its programming. What happens to programs if no one processes payroll? If no one chooses to create the program in the first place? If we stop raising money to support it? If we define a program expense as any expense that a program cannot run well without, then all expenses are program expenses.
This is not just semantics – it is critical to fundraising. Donors want to fund program expenses. Nonprofits make the mistake of cobbling together incomplete program budgets (often just direct service staff and supplies) and presenting these to donors. But when we leave out critical program expenses, we leave money on the table. And we struggle with how to pay our Executive Director, or our rent, or our insurance – all of which are program expenses in the first place.
The solution is to show our donors how all our expenses are program expenses and tailor our fundraising accordingly. Here are 5 steps to better budgeting that will increase your fundraising success.
Six office team members stacking their hands
1. Commit to complete program budgets. While your CPA must organize and report your expenses in tax categories, that doesn’t mean that you must use this structure to communicate your budget to the public. Take those same board-approved expenses and reorganize them into your program budgets. So for example, if your organization operates three programs, then Program A budget + Program B budget + Program C budget = the entire organizational budget. This communicates to the public exactly what your programs really cost. Most importantly, it draws a direct connection between the true cost of your program and the impact your program produces for the community. This effort is an extra step in your budgeting process, but you will raise more money as a result.
2. Allocate what is easy to allocate first. This is the step you are likely already doing. Salaries/benefits of staff members who work solely on Program A belong in Program A’s budget. For staff who work on more than one program, estimate their percentage of time spent on each program and allocate their salary/benefits accordingly. For example, if a full-time salaried staff member spends half their annual work hours on Program A and half their annual hours on Program B, then allocate 50% of their total salary/benefits to Program A’s budget, and 50% to Program B’s budget.
Supplies are often easy to allocate as well. The costs of supplies used only for Program A belong in Program A’s budget. The costs of marketing for Program B belong in Program B’s budget. If you own a vehicle that is used 25% of the time for Program A and 75% of the time for Program B, split the total vehicle/gas/maintenance costs 25%/75% between those two program budgets. And so on. Start your program budgets with these kinds of easy-to-allocate expenses.
A shelf with art supplies
3. Allocate the cost of your space. The cost of your organization’s physical space should also be split between your program budgets. This will require you to know your annual costs and the square footage of your space. First, add your rent/mortgage, utilities, maintenance costs, ongoing furnishing costs, and any other costs associated with your facilities. This gives you your true total facility costs. For example, your annual facility costs might look something like the following.
Rent $60,000
Utilities $12,000
Maintenance $ 2,000
Furnishings $ 750
TOTAL $74,750
Next, calculate the square footage of different rooms/areas of your space, and figure out what percentage those areas are of your total square footage. This gives you the cost per room or area. To go along with the budget above, let’s say this building is 2000 square feet, and your large program room is 800 square feet of that total. 800 divided by 2000 = 0.4. So this large room is 40% of your total space. Now we multiply 0.4 by our total costs of $74,750. This gives us $29,900. This is the annual cost of this room. If the room is used 100% of the time for Program A, then $29,900 goes into Program A’s budget. If it’s used 75%/25% of the time for two different programs, then 75% of this cost ($22,425) goes into Program A’s budget, and 25% ($7,475) goes in Program B’s budget.
You may choose to do this allocation differently if you have a space that uses a disproportionate amount of utilities, such as a freezer room at a food bank.
Office space can be allocated based on staff allocations. For example, if a staff member dedicates 100% of their time to Program C, then 100% of the cost of their office space should be allocated to Program C as well. We can assume they are using their office solely for that program. If a staff member’s time is split 40%/60% between two programs, then split their office costs the same way. For general spaces (restrooms, breakrooms, hallways, etc), use your best-faith estimate based on the other space and staff allocations. Are these areas that clients use? Are they only for staff, and which staff?
Two people in basketball wheelchairs reaching for a basketball
4. Allocate general program expenses. Once you’ve allocated staff salaries, space, and easy-to-attribute expenses, what do you do with what’s left? What about board expenses, fundraising expenses, insurance, technology, bookkeeping expenses, etc? These are all program expenses, because your programs cannot run without them. But they are harder to allocate because it’s hard to know which portion of these expenses supports each program. You could call these “general program support expenses.”
One way to approach this is to allocate everything in your budget that you can, and then calculate what percentage of these costs each program represents. We can then use that percentage to allocate the remaining general program support expenses. For example, let’s say that you have three programs. You have allocated all of your staff, supplies, space, and easy-to-allocate expenses. The totals of these allocations are as follows.
Program A: $258,400
Program B: $490,250
Program C: $124,700
TOTAL $873,350
We can calculate what percentage of the total ($873,350) each of these programs represents. That gives us this:
Program A: 258,400/873,350 = 30%
Program B: 490,250/873,350 = 56%
Program C: 124,700/873,350 = 14%
Let’s say that in addition to the $873,350 total listed above, we have an additional $282,000 in general program support expenses that we need to allocate. We can take these percentages above and split the $282,000 accordingly. So that would look like this:
Program A: 282,000 x 0.3 = $84,600
Program B: 282,000 x 0.56 = $157,920
Program C: 282,000 x 0.14 = $39,480
You can either list these general support program expenses line-by-line (you often need to do this for grant proposals), or you can group them together in a single line item as “general program support expenses” in your program budgets.
5. Use these program budgets as a basis for your fundraising. Add all expenses together to arrive at your true program budgets. Make sure that your program budgets add up to your total organizational budget.
True program budgets give you the information you need to create a strong fundraising strategy for your year. In the above example, you may need to plan to invest more fundraising efforts in Program B, since it is your largest. Or perhaps you have a funder with capacity to fund most of Program C, and you can increase your ask now that you know Program C’s true budget. As you cultivate donors and funders, use these program budgets to communicate the true costs of impact that your organization is producing.
You can also determine the true unit cost of service with complete program budgets. If your art camp program’s total budget is $150,000 and you have 500 participants per year, then you know that it costs you $300/person. You can ask donors to fund a particular number of aspiring artist participants. If you have participant fees, the true program cost also lets you know if you are charging enough, or what amount of the cost you need to subsidize with philanthropy.
True program budgets also show fundraisers when they have raised the full amount the program costs – which is a critical strategic and ethical issue. Many organizations rely on unrestricted annual funds to cover the cost of programs above what restricted funds are covering. But if you have large amounts of restricted funds, you want to make sure that you are not raising more funds than the program actually costs.
The time you spend determining true program costs is a great investment in your future fundraising success. If you don’t know what your programs cost, your donors don’t know, either. And if they don’t know, they can’t fund it.
If you are interested in true program budgets but overwhelmed by doing it yourself, we can help! Contact me for a quote today, and we’ll get you back to your pumpkin spice. Also, consider joining me at the 2024 GrantSummit in November, sponsored by the Grant Professionals Association, where I am presenting on this topic.