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Small and Large Non-Profits’ Budgeting Challenges Essay

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Updated: Sep 24th, 2020

Introduction

While budgeting as a whole has many strategic challenges, budgeting for the public and non-profit sectors has its own concerns that are unique to these types of organisations. The process of creating, implementing and maintaining a budget for a non-profit organisation (NPO) may be especially challenging due to such specific concerns as the lack of standard earnings system and reliance on stakeholders’ consistency. Thus, it is vital to address the problems that a person responsible for creating a budget can encounter while working with different types of NPOs. This essay attempts to describe NPOs, introduce general guidelines for budgeting in non-profits, outline challenges specific to this sector and present a number of possible solutions that one can utilise to make the budget effective and reliable.

Description of NPOs

Non-profits can have different purposes and take the form of a wide range of organisations (Zietlow et al. 2018). For instance, some non-profits may be concerned with local initiatives such as community education and support, while others may centre on global issues in the spheres of healthcare, religion and many others. However, the uniting factor of all NPOs and their defining trait is their charitable nature built on the focus on social causes. As a contrast to businesses, non-profits do not revolve around gaining profits and distributing them among the main stakeholders of the company (Shah 2007).

While in the for-profit organisations the budget may revolve around the end goal of gaining the highest possible amount of money, non-profits usually focus on furthering their goal. The main aim of each NPO is directly connected to its objectives and major operations. All finances gathered by these organisations directly or indirectly support the fulfilment of these goals and are not expected to bring particular financial gain as a result of service (Bryson 2018). Therefore, the process of creating a budget for such organisations cannot rely on profits derived from work of the NPOs members but should consider alternative ways of acquiring financial support.

Budgeting in the Non-Profit Sector: Guidelines

The beginning step to creating a budget for NPOs is the establishment of the main guidelines for the future budget. In order to stay focused on the main goals, an NPO’s budget should set specific objectives for the programme and its parts. These goals can also help one to allocate necessary funds to the most critical elements and resources required for an NPO to function. Here, the assessment of all activities that determines which of them are essential and which are not is appropriate. As NPOs usually do not have a stable source of income because of the lack of commercial operations, the allocation of funds to required resources is essential to the success of an organisation.

Furthermore, the attention should be given to the anticipated income sources, and the possible amounts of income as these aspects are the main determinants of the NPOs’ ability to manage their resources. For example, the total income amount that an NPO expects to receive can become the basis of the most positive plan of future events. It can provide the company with the amount that it can spend in order to achieve its goals and remain stable for the next period. Here, it is also possible to address revenue strategies and the rates of income and expenses. Moreover, the financial reserve of an NPO should also be included in the budget. NPOs can receive money through contributions, pledges, asset-generated income, funds, and some business or trade operations (Budgeting for nonprofits 2018).

Possible Issues for Non-Profit Organisations’ Budgeting

The budgeting process described above reveals a number of potential issues that should be anticipated during the budget’s development and implementation. First of all, unstable funding can be a major problem for planning an NPO’s budget. The instability of income that can be experienced by all non-profits may not allow for consistency that usually comes with a successfully planned budget (Zietlow et al. 2018). Grants and contributions made by donors are not always reliable due to their voluntary nature. NPOs have to cautious in relying on these sources of income in the long-run as the plans of donors may change at any moment. Thus, while keeping these sources of income as the main ones, the organisation’s budget should also be highly flexible and be ready to cut costs significantly to stay active. This is the main issue of NPOs and their main difference from businesses.

Government funding may also be a rather unreliable source of income for NPOs. While different large foundations can receive some support from the government, their relationships may change with each new policy, law or political focus. Moreover, certain individual decisions made by politicians and influential figures may also significantly impact the financial stability of an NPO (Zietlow et al. 2018). Thus, bob-profits may choose to pursue other sources of income which often require different strategies, more work and more resources, leading to different expense rates and further complications. These issues make non-profits precarious organisations lacking is stability and predictability (Baines et al. 2014).

Large Non-Profits: Specific Challenges

NPOs with a national level influence that have a more prominent budget often have more stable sources of income and finish their fiscal year with a more substantial surplus (Goff 2015). However, the size of these organisations does not protect them from the possibility of losing major donors. As large NPOs are more often supported by the government, their reliance on federal funding makes them vulnerable to any political changes (Goff 2015). Thus, the long-term goals of these organisations cannot be fully seen without caution. Although large NPOs may be more recognised by the public having more donors and stakeholders, their stability still depends on income. One of the benefits that help larger organisations remain active is the level of recognition by the public that eliminates the need for an NPO to spend additional money on exposure and engagement.

Small Non-Profits: Specific Challenges

Smaller NPOs have similar problems connected to unreliable income sources. While they are less likely to be engaged with governmental support, their contributors may also be unpredictable. However, small organisations also have a problem of finding new sources of income because they may not have enough exposure to the general public and possible donors (Hu, Kapucu & O’Byrne, 2014). For these organisations, donors’ decisions may become crucial and significantly affect the progress of their actions throughout the year. The necessity to create detailed budgetary plans with information about long-term and short-term goals places small NPOs in a challenging position. On the one hand, a well-structured and comprehensive budget can help the organisation to evaluate its strengths and weaknesses. On the other hand, this process requires significant expenses (Hu, Kapucu & O’Byrne, 2014).

Possible Solutions

While the process of creating budget may seem separate from other operations of the organisation, its implementation and maintenance are inherent to the NPOs processes. Thus, a change in the organisation’s comprehension of the finances may impact the budget’s creation and help an NPO develop a more sustainable solution. For instance, a clear understanding of the flexibility that is required from every NPO can help the organisation to become more aware of full costs and spending that might have to be changed during the year (Pal 2015). The decisions that once seemed logical and at some point produced good results should not be treated as the only possible option. The organisations should be ready for virtually any type of stability hindrance. Here, a detailed plan outlining all anticipated income sources should become the basis for further calculations (Bryson 2018).

Next, a list of all resources should be created to represent all expenses needed to support the organisation’s work. Furthermore, each resource should be evaluated according to its value as some of them may have to be reduced or completely removed in the case of financial problems. All future economic opportunities should also be examined with caution as they may require additional expenses (Pal 2015). A reserve fund should always be included in the budget to assure stability in difficult situations. Finally, every significant stakeholder in the organisations should realise that flexibility has to become the main aspect of each budgetary decision. Both large and small NPOs will benefit from incorporating more opportunities to exercise their adaptability and be more efficient.

Conclusion

The process of creating and integrating a budget in non-profits has its own unique challenges that can significantly affect the performance of the organisation as a whole. Both small and large NPOs can inadequately assess their income and required resources, which may lead to them becoming financially unstable and ultimately being unable to perform their essential activities. The main problem of budgeting for non-profits lies in their instability that comes from a non-business model of their existence. In order to overcome these challenges, NPOs and budgeting specialists should account for each small detail of the budget, rationally assess all existing and future donors and be ready to adjust the budget to fit the current state of the organisation’s financial situation.

Reference List

Baines, D, Cunningham, I, Campey, J & Shields, J 2014, ‘Not profiting from precarity: the work of nonprofit service delivery and the creation of precariousness’, Just Labour: A Canadian Journal of Work and Society, vol. 22, pp. 74-93.

Bryson, JM 2018, Strategic planning for public and nonprofit organizations: a guide to strengthening and sustaining organizational achievement, 5th edn, John Wiley & Sons, Hoboken, NJ.

2018. Web.

Goff, S 2015, . Web.

Hu, Q, Kapucu, N & O’Byrne, L 2014, ‘Strategic planning for community-based small nonprofit organizations: implementation, benefits, and challenges’, Journal of Applied Management and Entrepreneurship, vol. 19, no. 1, pp. 83-101.

Pal, N 2015, , Forbes. Web.

Shah, A (ed.) 2007, Budgeting and budgetary institutions, World Bank Publications. Washington, D.C.

Zietlow, J, Hankin, JA, Seidner, A & O’Brien, T 2018, Financial management for nonprofit organizations: policies and practices, 3rd edn, John Wiley & Sons, Hoboken, NJ.

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