Budget deficits —types and tactics
For nonprofits, running a budget deficit isn't the end of the world. Whether it's due to circumstances of certain income streams, restrictions on donor funding or changes in the philanthropic landscape, sometimes a deficit is inevitable. Here, we've collected some tips to navigate the rough waters of deficits — and to keep being in the red from giving you the blues.
What's in a name?
There are various reasons that a nonprofit might run a budget deficit, and not all of them are negative. Consider a few specific types of deficits:
A strategic deficit might be related to income reporting guidelines mandated by Generally Accepted Accounting Practices. For example, you might need to report grants and other revenues one year but actually receive them in another year.
An accumulated deficit is the typical deficit scenario you might imagine — a lack of ready funds with which to pay bills or settle accounts. An accumulated deficit can often be managed and paid down, perhaps by coming to payment terms with creditors, mounting an additional fundraising push or judicious borrowing.
A structural deficit can be a sign of more troubling financial concerns. Structural deficits may arise through factors such as long-term shortages of cash, excessive dependence on credit, and long-term wear-and-tear — or even decay — of facilities. A structural deficit warrants serious assessment of the long-term financial health of the organization.
Does a deficit require personnel or service cuts?
Often, cutting costs also seems to mean cutting assets such as branding, knowledge and expertise of staff, diversity of experiences and backgrounds, relationships with audiences and stakeholders, and any number of other less tangible assets. It pays to be creative, though — knowing that a deficit doesn't necessarily require drastic personnel or service cuts.
In an example cited by the U.S.-based Nonprofit Finance Fund, one theater general manager worked to overcome an 8 percent budget deficit by reducing rehearsal periods rather than cutting employees or performances. She also raised ticket prices slightly, partnered with another company in the same community, and added benefit events to the calendar. This combination of soft cuts with additional sources of income resolved the deficit without the loss of significant resources.
Is it ever OK to "finance" a deficit?
If a deficit leaves you without the necessary cash to settle expenses — such as rent, payroll or supplies —you might consider various financing options. This approach can be feasible in some cases, but it's a decision that shouldn't be taken lightly. Before you pursue financing, make sure you have a realistic, clear-headed analysis of your financial picture and are comfortable with your plan for long-term sustainable financial health.
Depending on the scenario, financing options might include:
- Offering employees temporary leaves of absence
- Restructuring existing debt
- Tapping into a line of credit
- Mortgaging property
What are some ways to boost morale in the midst of an unplanned deficit?
Weathering an unplanned deficit can be stressful at all levels of the organization. Consider these suggestions from the Nonprofit Finance Fund to boost morale and maintain focus on the mission:
- Eliminate blame. Instead, activate, articulate and organize around the mission.
- Be creative. Increase revenues on the margins. Work with partners to share costs and increase returns. Look for simple ways to reduce costs without jeopardizing the mission.
- Use your human capital. Work as a team, including board and staff.
- Be bold. Know your audience and communicate openly with them.
- Plan for solutions over time. Budget across multiple years, so you're planning for the future — not simply digging out of the hole.
Please also see Donorbox's guide to nonprofit budgeting
This article draws on the expertise of Andy Nash, founder of Andy Nash Accounting & Consultancy, which offers specialized accounting and financial consultancy services to small and medium sized nonprofits.
National Council of Nonprofits: Budgeting for nonprofits
Nonprofit Quarterly: A board's guide to surpluses and deficits by Kay Snowden (2008)
Nonprofits Assistance Fund: When is a deficit OK? (2012)
Blue Avocado: Nonprofit budgets have to balance: False! by Jeanne Bell
Nonprofit Finance Fund: Vanquishing nonprofit deficits: Notes on success from the field by Kim Cook (2011)
Charity Commission: Managing a charity's finances: planning, managing difficulties and insolvency (CC12) (2016)