Many nonprofits are proud of presenting a balanced budget where revenues equal expenses and the bottom line is exactly zero. And that’s not necessarily a bad thing.
The problem is that a balanced budget can sometimes create a false sense of security.
After all, budgets are based on assumptions. Donations don’t always arrive exactly when expected. Grants aren’t always renewed. Expenses have an uncanny ability to ignore our carefully crafted spreadsheets.
Inflation doesn’t care what your budget says. Neither does your insurance carrier.
A budget that balances perfectly on July 1 may look very different six months later. That’s why it’s important to look beyond a single year.
What a Forecast Can Tell You That a Budget Can’t
Imagine your nonprofit has a balanced budget:
| Year 1 Budget | Amount |
| Total Revenue | $500,000 |
| Total Expenses | $500,000 |
| Change in Net Assets | $0 |
Everything looks fine.
Now let’s assume:
- Revenue grows by 2% annually
- Expenses grow by 4% annually
The forecast may look like this:
| Year | Revenue | Expenses | Change in Net Assets |
| Year 1 | $500,000 | $500,000 | $0 |
| Year 2 | $510,000 | $520,000 | ($10,000) |
| Year 3 | $520,200 | $540,800 | ($20,600) |
Nothing dramatic happened.
No crisis.
No scandal.
No unexpected catastrophe.
Just expenses growing a little faster than revenue.
Yet within a few years, the organization has moved from balanced operations to recurring deficits.
This is exactly why forecasting matters. It helps you spot financial trends before they become financial emergencies. Read more about forecasting in the next blog.