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Lesson 14 of 36 · Read the Money

Budget, Cash, Restrictions, and Operating Reserves

A budget is the board’s quantified strategy and delegation. If it is merely last year plus a percentage, it hides choices.

Build an integrated budget

Revenue

By program and source:

  • registrations and fees;
  • lodging and rentals;
  • individual gifts;
  • foundations/government grants;
  • sponsorships;
  • events and auctions;
  • investment and other income;
  • in-kind support where accounting requires.

For each, identify:

volume × price/average gift × probability/timing × restriction

Do not plug an unexplained “fundraising gap.”

Expense

By natural type and program/function:

  • compensation, benefits, contractor/instructor costs;
  • supplies/materials;
  • occupancy, utilities, maintenance;
  • insurance and professional services;
  • marketing, payment/registration fees;
  • technology;
  • scholarships/subsidy;
  • development expense;
  • depreciation and capital.

Separate:

  • fixed/variable;
  • committed/discretionary;
  • cash/noncash;
  • operating/capital;
  • restricted/unrestricted.

Capacity

Budget hours as well as dollars:

  • instructors and program administration;
  • development and grant reporting;
  • finance/control workload;
  • building maintenance;
  • volunteer coordination;
  • board participation.

A grant can be fully funded and still overload the organization.

Program contribution

For a workshop:

gross earned revenue = paid participants × fee
direct contribution = earned revenue − instructor − materials − direct processing/travel
fuller contribution = direct contribution − reasonable shared staff/facility allocation

Example:

12 × $425 = $5,100 revenue
direct costs: $1,800 instructor + $900 materials + $180 fees + $420 travel = $3,300
direct contribution = $1,800; direct margin = 35.3%

If shared staff/facility load is $1,350, fuller contribution is $450. That does not prove the workshop should run. Add mission outcome, access, instructor relationship, donor appeal, and campus load.

Break-even seats:

fixed direct costs / (fee − variable cost per participant)

If fixed direct cost is $2,220, fee $425, and variable cost $90:

$2,220 / $335 = 6.63 → 7 paid seats

Define cancellation and subsidy rules before pressure arrives.

Cash plan

Create a monthly cash budget and a rolling 13-week forecast:

beginning cash + expected receipts − expected payments = ending cash

Show:

  • usable unrestricted cash;
  • restricted cash;
  • reserve/designated funds;
  • credit availability and terms;
  • low point;
  • payroll/tax/debt deadlines;
  • grant reimbursements;
  • major capital draws.

Probability-weight uncertain gifts; do not spend a verbal pledge.

Restriction taxonomy

Category Who constrains it? Example Change path
donor-restricted purpose/time donor gift instrument roof, scholarship, future period fulfill terms or obtain lawful donor/court release as advised
grant/contract restriction funder agreement approved project costs/period written funder amendment
board-designated board operating reserve proper board action
management earmark management planned equipment purchase management within authority
unrestricted no external purpose/time constraint annual gift without restriction use for charitable purposes within plans

Marketing language can create restriction. Review appeal wording. Track restrictions from acceptance through release/report.

Operating reserve

An operating reserve is not “extra money.” It provides time to respond to unexpected revenue loss or expense without harming mission. National Council of Nonprofits emphasizes that no universal reserve ratio fits every organization 1.

Policy should define:

  • purpose;
  • target and floor;
  • how target reflects seasonality, concentration, property, debt, and risk;
  • where funds are held/invested;
  • who authorizes use;
  • permitted uses;
  • notification/documentation;
  • replenishment plan;
  • reporting and annual review.

Possible target method:

baseline months of unrestricted operating cash
+ revenue-concentration adjustment
+ historic-property/seasonality adjustment
− reliable committed credit or highly liquid unrestricted resources

Do not count illiquid buildings as operating reserve.

Scenario triggers

Preapprove management actions within authority:

Trigger Management response Board response
unrestricted cash below 75 days weekly forecast; freeze nonessential hiring finance review
below 60 days activate downside plan board meeting/decision
forecast covenant/obligation breach notify chair immediately counsel/lender/funder path
high-priority building failure incident/capital protocol reserve/capital decision

Use numbers suited to actual circumstances; these are examples.

Budget approval questions

  • Does it fund the stated strategy?
  • What revenue is uncommitted, one-time, or restricted?
  • Where is seasonality?
  • What has been excluded—maintenance, benefits, systems, evaluation?
  • What are downside actions and protected priorities?
  • What grant match and reimbursement float are required?
  • Which assumptions need board help?
  • At what variance does authority return to the board?

Approve the assumptions, cash story, capital plan, and monitoring—not just a surplus of $1.

Source trail

References

  1. 1
    Operating Reserves for Nonprofits. National Council of Nonprofits. verifiedBoard policy considerations and the warning that no universal reserve target fits every nonprofit. Cited at: operating reserves.
Further reading
  • Financial Policy Guidelines and Example. Propel Nonprofits. verifiedPolicy framework for authority, conflicts, spending, contracts, records, reporting, restrictions, and reserves.
  • Internal Controls for Nonprofits. National Council of Nonprofits. verifiedPractical checks and balances for cash, banks, spending authority, vendors, and segregation of duties.

Check your understanding

  1. Which statement about a board-designated reserve is accurate?
  2. What is the strongest budget approval?