What is a Deficit Budget?
Faced with scenarios where revenue does not fully offset expenses, some nonprofit organizations plan for these shortfalls by approving deficit budgets.
This practice can represent a few of the following scenarios:
- Lower than anticipated fundraising or earned revenue for the year
- Fixed costs that will be incurred regardless of revenue earned (salaries, rent, other operating costs)
- Increased costs of doing business and less purchasing power due to inflation or other economic factors
- Prior year surplus funding or reserves being used to fund budget shortfalls
- Timing of revenue and expenses
While we understand that sometimes deficit budgeting is necessary, it is not a process that we recommend without comprehensive planning and attention to how organizations plan to fund their deficit, and how they eventually plan to break even (where revenue meets or exceeds expenses).
Risks of Deficit Budgeting:
- Entering a fiscal year with a planned deficit often underestimates how much the company’s shortfall will be – in some instances, the budgeted deficit is just a starting point of the actual losses that the organization may experience in a fiscal year.
- Multiple years of deficit budgeting can be an early indicator of a nonprofit’s ability to sustain itself given its current revenue and expenditures.
- Determining how to pay for the projected deficit could create challenges if an organization does not have access to cash resources or lending opportunities (lines of credit, loans, etc.).
- Organizations with deficit budgets can have challenges establishing credibility with funders, lenders, and other creditors.
Deficit Budget as the Only Option:
If a deficit budget is an organization’s only option, we present some forward-looking scenarios that can help mitigate the impact of a projected deficit on organizational resources. We recommend that these scenarios be presented alongside deficit budgets to focus the organization on a sustainable future.
- Understanding the full runway of the organization’s reserves: It is critical to understand what reserves/external funding is available and analyze how long they will last.
- Multi-year strategy to balance the budget: 3 – 5-year outlook that explores new revenue opportunities/expense savings strategies to balance the organization’s budget.
- Liquidity strategy – Determining how the organization will fund its deficits whether through endowment funding, reserves, or lines of credit. etc.
- If through loans, developing a multi-year repayment strategy
- Detailed revenue strategy that identifies opportunities and risks.
Tips to Mitigate Budget Losses:
- Lowering organizational expenses by reducing programmatic offerings and administrative expenses
- Seeking in-kind support and sponsorships to offset some of the organization’s fixed costs
- Releasing revenue from restrictions – reaching out to donors to change the purpose of funding could help in emergency funding situations
- Hiring consultants to save on staffing costs
If your organization seeks assistance with budgeting or long-range financial planning, we invite you to book a free 30-minute consultation with the CLE team here.