The worksheet was developed using income and expense line items frequently used by nonprofit organizations; download and modify to match your organization’s financial situation. In addition to the blank template, you can download and reference an example (file 2) to help you complete your own scenario budget planning template.

View Kate Barr’s free webinar recording for more guidance on how to use this template and think through your own scenario planning.

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Nonprofit organizations are founded and operated with a focus on a mission to serve their communities. This makes them different from businesses, which operate with a goal of making a profit for their owners. Yet nonprofits share many characteristics with businesses; both have revenues, expenses, personnel, and facilities. Like businesses, nonprofits sometimes need cash in the form of a loan to operate their programs effectively. Astute managers and boards understand that loans can be a tool to help their nonprofit grow and succeed.

Using Borrowed Funds Wisely

We know from juggling our own bills that it is never a good idea to borrow money that you cannot repay. Using loans wisely requires thought and planning about how the cash will be used and a realistic plan for repayment.
Consider an organization that has an opportunity to open a new site for their service. They research the location and find that it’s a good fit with their services and mission.

They develop a budget based on attainable fundraising and fees. The only obstacle is $20,000 of upfront costs to prepare the facility and buy furniture and equipment. They have several choices:

1. Decline the opportunity because they don’t have the necessary startup funds;
2. Delay a decision for up to six months until a grant request for startup costs can be prepared and considered;
3. Arrange for a $20,000 loan with monthly payments for four years and start the program right away.

In this case, it would be unfortunate to miss the opportunity. Taking out a loan in this situation is a demonstration of good management and planning.

Types of Loans

Borrowing to even out cash flow

Many organizations run into situations in which the timing of when they receive funds and when they need to pay bills and payroll get out of sync. Contracts may be on a reimbursement basis and grants come in uneven lump sums. Yet every organization needs working capital to pay the bills. If there isn’t sufficient cash in reserve, having cash available from a bridge loan or a line of credit can provide stability. The first step in arranging for a bridge loan or a line of credit is to develop cash flow projections to determine how much is needed to even out the bumps. Some cash flow needs can be anticipated in advance, while others arise because of unexpected delays or expenses. If a repayment source can be identified, a cash flow loan may be the solution.

Borrowing for capital purchases

Most organizations don’t have large sums of available, unrestricted cash to use for leasehold improvements, equipment, or other capital purchases. Yet having the facilities and equipment to operate is essential to delivering services, and lack of cash can be a real obstacle. Sometimes a grant or in-kind donation can fit the bill, but in many cases, a term loan with monthly payments is the best tool.

To purchase or renovate a building, a mortgage loan is familiar to most of us. The amount that the organization can expect to borrow for a building will depend on the cash flow available for monthly payments as well as the value of the building. If a capital campaign is planned to pay for some or all of the building costs, there may still be a need for a capital bridge loan to have the cash available until the campaign is done and all the pledges are received.

Borrowing to take advantage of an opportunity

As the earlier example shows, a loan can provide upfront cash to start or expand a program. In other situations, cash may be needed for an office move or to start an earned income venture or program. Mergers, also, may require some cash for one-time expenses such as consultants, changes to facilities, or communications. Loans can be arranged as bridge loans with monthly payments or with a lump-sum balloon payment due when there is cash flow from new program funding.

Borrowing to consolidate debts

Some nonprofits find themselves in financial trouble caused by events outside of their control or poor management practices and decisions. Bills and debts may accumulate and threaten to overwhelm the mission and operations of the organization.

In this situation, loans can be helpful only as a part of a turnaround plan that will set a new course for the organization. Using loans to pay off other obligations, usually in a term loan over several years, can take the pressure off and allow the management and board to focus on serving clients and improving management and governance.

However, the problem isn’t solved if, as the saying goes, you just “borrow from Peter to pay Paul,” so applying for a debt consolidation loan requires considerable analysis and planning.

Loan Terms

There is no “one-size-fits-all” loan. Loans can be structured with regular monthly payments for several years or as short-term loans that are fully paid in a few months. Once you know the amount you need and have an idea of the timeframe for the use of funds and repayment, meet with a lender to discuss their terms and application process. Interest rates will vary depending on the amount, term, and the risk associated with the organization’s financial situation. Be sure to ask also about fees and other costs of the loan.

Borrowing Myths

Some people believe that borrowing is a sign of dire trouble – proof that the board and management have done something wrong. The truth is that managing cash flow, making loan and interest payments, and planning for stable operations are all part of successfully managing an organization. There is also a concern that foundations and other funders will look askance at nonprofits that “need to borrow.” Actually, savvy funders understand the complexity of managing a nonprofit. They know that loans can be valuable tools for cash flow and financial stability.

When to Borrow

The right time to use borrowed funds

The right time to consider seeking a loan is when you know how the funds will be used, have a plan for repayment that is based on reasonable assumptions for future income, and have the support of the board.

The wrong time to look for a loan

If an organization has been operating with a persistent deficit, a loan is not the appropriate tool to fill the gap and pay ongoing operating expenses. Adding debt on top of accumulating losses is a step towards bankruptcy. If you don’t have any realistic idea of when or how the loan can be repaid, it’s time to step back for a more in-depth financial assessment.

Applying for a Loan

The most important information to have when applying for a loan is recent, accurate financial information about the organization, a plan for the amount and use of the funds, and a repayment plan. The lender will have questions about the organization’s history, plans, cash flow, management, and board. Lenders will require some type of collateral (a building, equipment, or accounts and grants receivable), and legal documents, such as the by-laws and a resolution from the board of directors. Your loan request will receive the best hearing if you are able to discuss the request with the loan officer and be sure that they understand your needs and ability to meet their requirements.

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While the long-term goal for nonprofits is not to return profits to shareholders, we all know that nonprofits are business entities that need to maintain financial health and stability in order to achieve their mission. Understanding the true, full cost of delivering various programs and services in the community is a critical piece of the management puzzle.

Why Does This Matter?

Equipped with accurate information about the cost of each program area, nonprofit leaders are better able to plan and manage budgets and make the case for support and for contract terms that cover the full cost of services. One of the most valuable results of understanding the true cost of programs is the ability to make wise choices about how to support mission critical work. For most nonprofits, some programs may be financially self-sustaining or even generate a surplus. Other activities may require periodic or ongoing subsidy from fundraising or other program areas. Deciding whether and how to support these services is a central strategic decision for nonprofits. Knowing the real costs of each program allows us to make informed decisions and choices that will lead to mission and financial success.

Propel Nonprofits Program Budget and Allocation Template and Resource

Propel Nonprofits developed this guide and spreadsheet template to help nonprofits implement program-based budgeting and financial reporting. This resource is an overview of the concepts and management decisions needed to calculate the true costs of activities for a nonprofit and also a how-to guide for the accompanying spreadsheet template. You can find a glossary of terms in our resource library and below, a list of articles and resources for more in-depth discussion or technical guidance on this topic. The accompanying spreadsheet template may be used for a one-time analysis project or to implement ongoing program-based budgeting and financial management practices. While a calculation can be completed for a single program or activity, we highly recommend that these concepts and practices be used throughout a nonprofit. Program-based financial information will be most useful for planning, management, and communications if it is comprehensive, accurate, and used consistently.

Getting Started

Before diving into the numbers and spreadsheets, it’s important to begin with a discussion about why the organization is undertaking this process, any specific goals you have, how the financial information will be used, and who will be involved in developing and using the information. If the organization has never allocated costs or overhead before, spend some time discussing the concepts and practices described in this guide. Having a shared understanding and buy-in from senior leaders, financial staff, and program managers is critical to both creating the budget and to using the information for planning and strategic decisions.

Gather the Data

Developing accurate program budgets and allocation formulas requires a number of data sources. Assemble as much as you can in advance, though it’s likely that more questions will come up once the process is underway. Some of the information will be specific to your organization, but as a first step you’ll need: a list of income and expense categories, detailed budgets, a list of staff, their compensation, and records or estimates of their activities, and information about major expense items, such as facility and program expenses.

Overview of the Process

1. Define your programs
2. Establish format and structure for accounting
3. Identify direct and indirect costs
4. Select allocation approach and methods
5. Allocate staff salaries, benefits, and taxes
6. Assign direct expenses
7. Allocate direct costs by an appropriate method
8. Identify program specific and general income categories
9. Allocate indirect (administrative) costs
10. Allocate fundraising costs
11. Bring it all together for review

1. Define your programs.

The process begins with the decision of which activities at your organization comprise a program for the purpose of budgets and financial reports. Often, the definition of programs is evident in how your organization delivers services and functions internally. You may already have clearly defined programs, departments, or projects. Some nonprofits identify every activity or grant as a separate program while others combine many activities under the umbrella term. For budgeting and allocations we suggest that you separate your activities into distinct programs that will provide meaningful insight into the financial model. At the same time, avoid making it overly detailed or complicated. As an example, an afterschool program may operate in two locations or be funded by three grants. If the program operates with similar goals, measures, costs, and staff, we’d suggest that these be grouped as a single program.

2. Establish format and structure for accounting

Calculating and analyzing the true cost of programs and activities can be completed as a one-time project or implemented as an ongoing management practice, as we recommend. If that is the goal, it’s worthwhile to make sure that the program and cost definitions match the setup of your accounting system. Any accounting software can be used to maintain program-based financials, but they each have their own structure and terminology. One benefit of structuring accounting this way is that you can control your chart of accounts – the list of income and expense categories. Nonprofits that create new line items in their accounting system every time they start a new program or get a new grant will find that they can simplify their accounting by using program “cost centers.” Whichever system you use, make use of “cost centers” for the programs you defined and for management & general (administration) and for fundraising. These two cost centers are important components of understanding true costs and are created in parallel with the programs. By organizing your budget and allocations this way, you’re also setting up the accounting system to track and report the three functional expense categories required on audits and the IRS Form 990.

3. Identify direct and indirect costs

The terms direct and indirect costs are used with widely varying definitions in the accounting world. For our purposes, we define indirect costs as those expenses that support the overall management of the organization – often called administrative costs or management and general costs. Indirect expenses include the costs of accounting, board meetings, general liability insurance, and other costs associated with running the organization as a whole. This distinction has been problematic for many nonprofits because of the simplistic idea that common costs such as rent, utilities, and technology are all indirect costs, or overhead. The accurate definition for direct costs is those costs that are required to carry out a program or function. Direct costs may be devoted to one program but more often are shared by more than one program. Rent, for example, is a direct cost for all programs that make use of the facility to plan, manage, and deliver the program services based on how much of the space they use. The portion of rent that is for space used for general administration is categorized as indirect. Fundraising may also have direct costs or receive an allocated portion of a direct cost, as will be explained later. Sometimes direct costs will be allocated to all program areas and cost centers, including fundraising and administration. We will discuss the allocation of both direct and indirect costs later in the process. This step asks you to take a fresh look at the list of expenses and identify all of the direct and indirect costs.

4. Select allocation approach and methods

Once you’ve defined which expense items are direct program costs that are shared by more than one program, you also need to decide how to allocate the cost appropriately. The best allocation methods are reasonable and justifiable while also being simple enough to calculate and maintain over time. An example would be the cost of office supplies that are used by all of our programs and by fundraising and administration. Rather than counting every pen we look for a reasonable basis on which to share the expense proportionally. For our office supplies example, we’ll allocate the expense based on the number of staff members who work in each program, calculated based on FTE. This is a practical method for expenses that “follow the people.” The most common allocation methods are: FTE or staff time, square footage, number of clients, “units” of services, and percentage of total direct costs. Other methods may also be appropriate and useful if there is a reasonable connection between the method and the actual use of the resources or expense. The basis of the calculation is sometimes called a “cost driver.” In order to keep the allocation system manageable we recommend that you create and maintain just a few allocation choices. The chart on the next page can help you select allocation methods.

5. Allocate staff salaries, benefits, and taxes

Given the significance of personnel expenses to our finances, allocating these costs is essential to understanding true costs. How does each member of the staff spend their time? Job title doesn’t necessarily provide the answer. If the Program Director spends 50% of his or her time managing Program A, 30% supervising the managers of Program B, and 20% acting as the organization’s HR director, then 80% of the cost of salary and related benefits will be allocated between the programs and 20% will be included in administrative, or indirect costs. Many Executive Directors spend a substantial amount of time working directly in programs. Ideally, salary allocations will be based on regular, reliable tracking of time. The data is already available for nonprofits that track time for grants and contracts. If that has not been your practice we urge you to gather some accurate information by completing a timekeeping report or adding time reporting to payroll or database records. We know from experience that allocating time based on general estimates or gut feeling is often inaccurate. The goal of program-based budgets and allocations is to gain a solid understanding of the true costs, and staff cost is too important to leave to guesswork.

6. Assign direct expenses

When an expense is clearly and exclusively incurred for a specific program area or cost center, we simply assign the expense to that program area or cost center. Examples might include materials purchased specifically for a tutoring program or the cost of an evaluation consultant to document the results of a preschool program. Administration and fundraising may have direct expenses assigned to them as well. The cost of an annual audit would be assigned to administration. The cost of return envelopes to be included in a fundraising mailing would be assigned directly to fundraising.

7. Allocate direct costs by an appropriate method

In this step you apply the allocation methods described above to the various direct costs that are shared between programs, which may include administration and fundraising cost centers. For the earlier office supply example, you would add up how many FTEs work in each program area and calculate a formula as a percent of the total number of staff. These calculations may be automated through the accounting system or completed manually. The formulas should be revisited if there are major changes in the way expenses are used, such as staff reassignments or growth of a program. For many organizations the formulas don’t change more than annually. At this point you will have a subtotal of the direct costs of each program, administration, and fundraising. The process doesn’t end there, though.

8. Identify program specific and general income categories

This process is most valuable when a nonprofit can understand both the full cost of delivering programs and the amount and type of income that relates to those programs. Leaders can use this information to analyze the financial model of programs individually and as part of the whole. In this step you will identify which income items are connected to specific program areas and what income can be directed at the organization’s discretion. Examples of income that is assigned directly to a program include contract or fee income for a preschool program or a grant that is received for a tutoring program. For this step we recommend that contributed income that is unrestricted or general operating support be assigned to the fundraising category for the analysis. The final analysis will clearly show what program areas require these sources of support and enable leaders to make the all-important decision about how to best attract and direct flexible funds.

9. Allocate indirect (administrative) costs

The cost of administration, categorized as indirect costs, adds value to every program at a nonprofit. Programs are more effective, better managed, and more responsive to the community when an organization has good accounting and technology, high quality leadership, planning, and governance. In order to have a true picture of what our programs really cost, we must allocate these indirect or administrative costs as well. If we ignore this step, we will be underrepresenting the expense involved in supporting each program area. As explained above, indirect expenses are generally all of our administrative expenses – those expenses that support the overall management of the organization. Some expenses are assigned to the indirect category specifically, such as the audit. Others are allocated to the indirect category, such as a portion of rent and telephone. For this reason we wait until after all the direct allocations are completed before we turn to allocating the indirect costs. The two most common methods for allocating indirect costs to programs are percentage of total direct costs and percentage of FTE.

10. Allocate fundraising costs

Similarly, the cost of fundraising is valuable to programs and the final step is to allocate fundraising expenses to each. The most common basis for allocating fundraising costs is based on percentage of total support received by each program. This method matches the percentage of fundraising expense charged to a program to the percentage of contributed income that program receives. We leave this step until last because some funders, including many government funders, will not allow fundraising expenses to be charged to their grants or contracts. Regardless of whether a funder will pay for fundraising expense, it remains part of the total cost of running each program and we need this information to be truly informed. The same is true for allocating administrative/indirect costs.

11. Bring it all together for review

After completing the full program-based budget or financial analysis it’s worthwhile to take a fresh look for both accuracy and a gut check. Do the formulas, amounts, and financial results match what you expected, or do they surprise you? If there are surprises, first review the data to verify the calculations and choices about allocations and definitions. Sometimes, though, the surprise comes from seeing the true and full costs for the first time. The benefit is that you now have better information for discussions about priorities and how resources are used. With this information your organization is better equipped to review costs, prices, and contract terms; communicate gaps and fundraising priorities; and discuss which programs require financial support and how that relates to accomplishing your mission goals.

Allocation Methods

Additional Resources and Links

This overview and guide to using the Program Budget and Allocation Template is not intended to be a definitive or comprehensive document for such a complex financial management practice. We hope that you will be able to use this resource to understand the concepts and steps and to implement this valuable process at your nonprofit.

From Propel Nonprofits:

• Overhead Cost Definitions
• 10 Step Budgeting Checklist
• Transforming Nonprofit Business Models

From other sources:

• Real Talk About Real Costs video, Forefront
• Costs are Cool: The Strategic Value of Economic Clarity, The Bridgespan Group
• Nonprofit Cost Analysis: Introduction, The Bridgespan Group
• Book: The Sustainability Mindset by Jeanne Bell and Steve Zimmerman

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Nonprofits are appropriately viewed primarily as mission-driven organizations. Evaluations of success focus on an organization’s impact in the community, such as job placements, academic achievement, and family stability. However, nonprofits are business enterprises as well, built on an underlying business model that makes the programs and organizations operate and succeed. The recent economic downturn stressed many nonprofits and led to questions about the sustainability of prevailing nonprofit models. Leaders of every nonprofit must carefully assess the effectiveness of their particular structure and prepare for a potentially different approach in the future.

Business models at nonprofit organizations have never been static. The structure and composition of revenues, expenses, and capital evolves over life stages and in response to external events and internal strategy. Rather than worry if “the model is broken,” nonprofit leaders must prepare for their next business model and invest resources to sustain the mission and serve the community. This preparation consists of four steps:

• Understand the current operating model;
• Diagnose any critical weaknesses;
• Forecast and plan a structure that will address the weaknesses and be effective in the short and midterm future;
• Implement the needed, and possibly difficult, changes.

Seeking an ideal or permanent answer is not productive, nor is it likely to be successful. Organizations grow, change, contract, and change again. This is not a simple process, and it will require the commitment of staff and board leadership and a shared vision of the ultimate, mission-driven goal.

Business Model Concepts

The financial structure of nonprofits contains four core components shown in the graphic to the right. Together these define the business model that creates value for the community and sustains the business entity. The four components are closely inter-related and each will be impacted by weaknesses or changes in any of the other three. Like a set of gears, if you move one, the others shift as well. The first step – understanding the current operating model – begins with inquiries and analysis of these elements. Diagnosing the critical weaknesses requires a realistic assessment of both external economic factors and past decisions and leadership actions. Forecasting and planning may lead to significant changes that affect core organizational operations and programs.

Transforming Nonprofit Business Models

Assess the current condition of the four financial components of the business model to complete the process of developing a forecast and plan to implement the changes needed for the next stage.

Revenue Mix

The value of revenue diversification is a time-honored assumption in nonprofit financial planning. Realize though, that each different type of revenue requires a nonprofit to operate a new business. Government contracts, individual donors, and foundation grants require different infrastructure, expertise, and relationships. Most nonprofits have one or two dominant sources of revenue supplemented by one or two secondary sources. Few nonprofits can manage six or seven different revenue businesses effectively. Revenue growth is accomplished by developing reliable systems and relationships geared to those sources. The lure of diversification is understandable when you consider how difficult it is to replace a dominant revenue source. Many social service nonprofits are in this situation after having grown revenue with public funding, the very source that has been impacted most severely in the past few years.

• What is your dominant revenue source?
• How is the availability or stability of that source changing?
• Do you have other significant or secondary types of revenue that can be developed further with existing systems and capacity?
• If you need to create a new revenue type, do you have capital or capacity to invest in order to build the new business?

Infrastructure

For the last few years, nonprofits have been cutting corners and reducing costs. Many of the cuts have been in administrative expenses in order to preserve program services. Stable, effective leadership, governance, management, and fundraising are essential for longterm health. Now that all the corners have been cut, and more, nonprofits need to take a hard look at how they have operated in the past and look for ways to change the expense structure while maintaining vital infrastructure. Overall, nonprofit budgets are often developed by starting with the previous budget and adding or subtracting based on available resources. This process reinforces “we’ve always done it that way” thinking. A sustainable business model needs new thinking. Since personnel usually accounts for more than 60% of expenses, the review often includes changes to staff roles and responsibilities. The “answer” isn’t necessarily to reduce staff or salaries, but may result in new or different positions. Every expense area needs thorough review to seek different ways of accomplishing the nonprofit’s goals.

• What are the three largest expense types?
• Do you have a way to evaluate the effectiveness of these three costs in carrying out strategies?
• What are the possible alternative structures or options to deliver similar results?
• What are the strengths and weaknesses of the current infrastructure?
• What could be accomplished with stronger systems and support?

Cost of Effective Programs

Understanding the true cost of delivering their programs enables nonprofits to make clear decisions and choices about the value and priority of a portfolio of services. The true cost of programs includes direct costs that are normally attributed to the program, plus allocations for common costs such as occupancy, technology, office expenses, and communications. Programs also require the services of human resources, accounting, and other centralized administrative functions. These costs should be shared by programs using a rational and consistent method. The true costs of programs may be very different from the costs stated in contracts, and is often much higher than the prices paid by third parties or funders. The difference between cost and price is subsidized by the organization using contributions, general operating funds, earned income, or reserves. Allocating the available subsidy is one of a nonprofit’s most important financial decisions and should be made intentionally based on mission, impact, and strategy.

• Do you know the true program cost of core programs?
• Does this translate to a “per unit” cost?
• For programs that require subsidy, is the decision to provide subsidy justified by mission fit and program effectiveness?
• Does the organization have sufficient subsidy dollars available? If not, will reductions or changes be based on mission and program effectiveness?

Capital Structure

Without access to an equity source, capital at nonprofits is accumulated incrementally through fundraising, capital campaigns for buildings and endowments, and budget surpluses in the good years. The capital structure is revealed in the asset composition. Many nonprofits have substantial assets but virtually no liquidity because their assets are invested in buildings, long-term endowments, or restricted cash. Capital has been underemphasized in the nonprofit sector for years, with little attention paid to balance sheets and net assets. The importance of appropriate capital structure has never been clearer than now because unrestricted working capital creates capacity to invest in changes such as new fundraising initiatives, program development, and branding and marketing. Capital is also represented in the nonprofit’s financial obligations such as mortgages, long-term bonds, and other liabilities. The structure and cash requirements of these obligations can have a big impact on financial flexibility and cash flow.

• What are the two largest assets? Are they liquid or illiquid, restricted or unrestricted?
• Do the two or three largest assets significantly contribute to mission and program strategy?
• What are the two largest liabilities?
• Does the structure of these liabilities still fit the organization’s operations and budget?
• How much does the organization have in unrestricted net assets? What is readily available in cash and liquid funds to invest in the organization’s future strategies?

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