Budgets are important because they allow people to have conversations based in reality. They are tools for learning and accountability, but only if staff people and boards are familiar, even intimate with them.
So, yes, besides an overall budget, there needs to be a fundraising budget, both income and expense, and everyone has to understand that budget not just so that you can monitor the ROI of this year’s activities but so that you can become ever better at predicting costs and outcomes.
The CEO, the board of directors, and senior staff.
All of the development staff—not just the chief development officer.
The finance staff, of course.
And I want the program staff to understand the general elements, too.
You may not have all these staff or all these positions. But the concept holds true no matter your size. I expect all employees to see and understand the general budget of the organization, and that includes the core elements of the fundraising budget.
By the way, I expect all your donors and prospective donors to have access to this information, too, if they wish it. “How much did you spend to get my $10?” This variation on “How much of this goes to program?” may be a misplaced question in some ways, but it’s one you should be willing and able to answer.
Let’s start with the general budgeting process
In general, a budget is a financial description of your organization, its priorities, and its sustainability. Your board members and staff work to align the narrative and financial descriptions with sustainability and an understanding of what it takes to operate the way you wish to and the way the environment will allow.
Budgeting takes a long time and requires lots of work by many people. Ultimately, the board of directors approves the budget; it then holds equal responsibility (with management) to ensure accomplishment of that budget.
It’s essential that all board members understand budgeting, financial management, and reporting at a fundamental level. You also need multiple board members who understand it at a higher level. And then you need a cohort of board members who are experts in budgeting, financial management, and reporting.
Always include a narrative (footnotes, cover memo, etc.) that explains the organization’s approach to budgeting. The narrative also includes assumptions for income and expense, e.g., 10 percent increase in health insurance, expansion of a particular program, etc.
The cash flow budget
Many small organizations operate on a thin margin, and that means any fundraising budget needs to be sensitive both to when outlays can be made and when revenue will come in to cover ongoing costs. A good cash flow budget. The cash flow budget projects monthly income and expense, and the beginning cash balance for each month. Never just divide up your annual budget by 12 months!
The cash flow budget helps you determine when you need more income to pay a big expense, e.g., a balloon payment on your facility mortgage, or the health insurance fees, or retirement contributions. The cash flow budget also helps you schedule your fundraising activities to produce income during cash-poor months. Needless to say, no one wants to live that way, so over time your board may wish to think about how to salt some of the revenue you make through good fundraising away into a working capital pool sufficient to manage over the highs and lows.
Budgeting for fundraising requires knowing about fundraising
Creating the optimum budget for fundraising—both income and expense—requires significant knowledge about best practice, industry standards, and fundraising research. Otherwise, you can’t properly design a comprehensive fundraising program and appropriately plot the required expenses and estimate the probable income.
This is important. An email campaign may cost less than a direct mail campaign, but both together have been proven to work better, along with some house parties. Considering what costs are against their probable returns is important, too. Have you budgeted in money for “prospecting,” which is always more expensive than returning to previous donors? Does it make more or less financial sense to participate in Giving Tuesday rather than just doing your own campaign? All of these questions should be figured out in terms of return on investment.
Unfortunately, too many people don’t know the body of knowledge, best practice, and research in fundraising, and that will make your projections less accurate—which can be disastrous. You can’t properly budget income and expense without the right expertise and experience. To think (and behave) otherwise is risky and pretty much dumb, so if you need to learn, look for a mentor.
Absolutely never ever do this! (Too many organizations do.)
“Add up all your expenses to do your great work and carry out your very necessary mission. Then use that to set your fundraising goal.”
That is so wrong that I want to rant and rave!
Yes, add up your expenses to do your work. But at the same time, the fundraising team is calculating how much money might be possible to raise.
Then, the organization compares the estimated total expenses and the estimated possible (even probable) income. Smart organizations focus on the income as the control. Smart organizations don’t simply add more charitable contributions to the income side. Really smart organizations reduce expenses to comply with income.
In my years of consulting, I’ve listened to organizations tell me the following:
“Of course we set the charitable contributions goal to meet expenses. Because we count on someone dying and the bequest fills in the gap.”
Another organization said, “Yes, we increase fundraising income because God will provide.”
And a third organization just shrugged and said, “Well, that’s the way we do it. And then we cut later if we absolutely have to.”
This is poor planning, weak financial management, harmful to staff and beneficiaries, and just bad business. Need I go on?
By the way: Who is responsible for raising this money? The entire organization. Every single board member helps to nurture relationships and secure gifts, and gives their own personal financial contribution. Every single employee behaves in a donor-centered and customer-centered manner, helping to retain current donors and acquire new donors.
Budgeting fundraising income
It costs money to raise money. Remember that the body of knowledge, best practice, and research tell you where to focus your attention, how to invest your money, whose advice to follow, what to expect, and so much more.
For example: When estimating fundraising income, consider these various criteria:
Compare multi-year trends in your organization’s fundraising. In your comparisons, remove any gifts that you consider unlikely to repeat.
Examine retention rates.
Evaluate and estimate likely gift increases per donor, based on the quality of the relationship.
Make sure you’ve been talking with all foundation and corporate donors to determine the likelihood of their repeat gifts.
Measure donor satisfaction (See Adrian Sargeant) as you estimate gift increases and retention.
Evaluate the effectiveness of your donor communications (g., readability, donor centrism, quality of stories and writing, etc.)
Determine your DCQ (donor-centered quotient).
Organizing charitable income by source
Organize your charitable gift income by source, e.g., individuals (where most gifts come from in North America), foundations, corporations, net of special events, civic groups, and faith groups.
Those are the most common categories for financial planning. That’s the way that the fundraising industry analyzes activities and studies progress across the sector.
Your board and staff need to understand and respect the concept of income by source. This directs the organization’s attention. And by the way, remember that special events can be the most risky, with the least ROI.
Of course, the development operation itself will also plan, execute, and analyze by solicitation strategy. Things like: Personal face-to-face solicitation (the best way to secure gifts). Direct mail. Telephone. Proposals. And so forth.
Closing thoughts and tough stuff to accept
Yes, it costs money to raise money. In fact, it’s estimated to cost 10 times more to acquire a new donor than it does to keep a current donor. So your fundraising budget must include the cost of relationship-building activities. Lifetime Value (LTV) is how you amortize those costs to retain donors.
Fundraising is a profession. You need top-notch professionals to help you raise money—and develop plans and budgets that reflect the body of knowledge, best practice, and research.
Many board members and CEOs don’t know the right stuff to do this fundraising work—including budgeting—well. That’s okay. In fact, I don’t expect all board members and CEOs to know this stuff. But if they do not, I do expect them to hire fundraising professionals and let those fundraising professionals do their work. And that work includes teaching the rest of you how to budget for fundraising.
Link to the original article: https://nonprofitquarterly.org/2016/09/08/fundraising-on-a-budget-and-understanding-the-fundraising-budget/