The Balancing Act of Not-for-Profit Balanced Budget
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.