Before you start, I wanted to let you know about a common misconception that the total revenues have to equal total expenses on the budget. This is not true. You can budget for a surplus or a deficit. “But I’m a non-profit”, you say. Well it’s not a requirement of a tax-exempt nonprofit to end up with no money at the end of the year. The requirement is that any surpluses you do finish the year with, don’t go to stockholders or owners, the surpluses stay within the organization to continue its mission.

The flip side is actually budgeting a deficit – which is more of a reality even as our economy starts to show small signs of revival.  Sometimes, it’s just not realistic to balance a budget.  However, I would not come to this conclusion lightly, and I would involve the Board and Finance Committee from the beginning when determining when/how/and more importantly why. Obviously, budgeting a deficit should be a rare occurrence in your organization and everyone needs to be on the same page, specifically how it affects the future of the organizaiton. Hopefully, it’s not a situation that you have to repeat.

The underlying theme here, is that a budget should be a tool to plan financial performance and evaluate results. Don’t have a balanced budget when you realistically should surplus $500,000. Your organization will tend to gravitate to low expectation. Conversely, if you have a balanced budget, and the best your group can hope for in the current environment is a $100,000 deficit, then you’re setting everyone up for failure – and possibly some rash decisions as a result of failure. Each of these scenarios also makes it difficult to evaluate performance and management because the goal was not properly set. You want to accurately define success with your budget, and then during the year be able to monitor performance against that definition.

Keep this in mind during the current process.  It might be best to get a bottom line number approved by the Board before starting.  Make sure your budgets reflect a realistic goal that will define success for your organization. You and your organization will be better off for it.