A Balanced Nonprofit Budget Can Still Hide Financial Risk

The useful part

Pexels by MART PRODUCTION A zero at the bottom of a budget reads as good news. Someone spent weeks reconciling program requests with revenue projections, the finance committee pushed back on a few line items, and the number that came out the other end was zero — or close to it. The board approved it, everyone exhaled, and the meeting moved on to the gala.

How it works

• I have watched an organization balance for years while its deferred-maintenance list grew into a capital campaign nobody had planned for.
• If you stopped receiving revenue today, how long could you keep paying people?
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What to take from it

The budget balances because the roof, the raises and the open program director role all moved to next year— and next year they will move again. If the budget balances only because of a line of credit, the problem is not timing. The revenue line mixes signed contracts, grants already awarded, and renewals in hand with a fundraising goal that is really a wish.

Example or evidence

• His first book, "The Turnaround Trap," will be published in 2028.
• One organization balanced three years running on contributed revenue growing at a rate it had never once achieved.
• The nonprofit simply carried forward a spreadsheet formula that created an automatic plug on the annual fund to bring the "operating surplus/(deficit)" to zero.
• If the hoped-for bucket is bigger than the surplus, you are approving a bet.

Details worth keeping

Effective nonprofit budget planning requires more than reaching zero since that can happen through frozen positions, deferred maintenance, an annual fund number that assumes this year's donors will be more generous than last, and operating plans that do not fully account for limits on restricted dollars. A private-equity board member once told me depreciation was "nonsense money." It's nonsense only if you are maintaining the asset base. If you aren't, depreciation is the shadow of a bill you will pay later, and it belongs in your budget math whether it's in your budget.

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