The Balancing Act of Not-for-Profit Balanced Budget

May 13, 2013

By Brian Collins, CPA 

The belief that a not-for-profit’s budget must balance is one that should be left at the door of the next budgeting meeting.  Rather than fixating on the idea of a balanced budget, focus on the more important position of identifying the desired financial outcome of the not-for-profit organization.

A surplus budget should be adopted if it is the goal of the organization to increase reserves or to improve net assets, which can lead to a stronger financial position.  A surplus budget must be realistic and obtainable; otherwise, what’s the point of creating a budget at all?  It is also vital that once the reserves are obtained through a surplus, the organization adopts a policy on how the reserves are to be managed.

A break-even budget is adopted by a not-for-profit organization as the funding from grants and government contracts they receive are often budgeted to break-even.  Although the grants and contracts are break-even by design, that does not require that the organization’s budget to be break-even.  A break-even budget can show a lack of planning by the organization.  A break-even budget doesn’t allow an organization to accumulate reserves or properly invest in its future.

A deficit budget may be budgeted if an organization has large reserves.  Although not a common issue for many not-for-profit’s, an organization with large amounts of unutilized reserves can lead donors to believe that the organization is not in need of their contributions.  A more common reason for budgeting for a deficit is the preparation to invest in a facility upgrade or new equipment that would benefit the organization in the long run.

While the concept of a balanced budget is based on sound principles, the idea can be unnecessarily limiting for some not-for-profits.  It is important to have an understanding of your not-for-profit’s financial objectives when preparing the organization’s budget and to be able answer why your not-for-profit’s budget is a surplus, break-even, or deficit budget.
 

 

About Brian Collins

Brian Collins is an Audit Senior Manager with over 15 years of public accounting experience. He performs outsourced accounting services, audit, review, compilation, and tax services for a wide range of clients in various industries, including not-for-profits.