Nonprofits: 5 Reasons to Build a Surplus Budget

In the most recent State of the Sector Survey, the Nonprofit Finance Fund found that 36 percent of the 2,200+ respondents ended 2024 with a deficit. The federal election, shifts in immigration laws and policies, high costs due to inflation, and other 2024 stressors resulted in the highest percentage of nonprofit deficits that the NFF has seen in over 10 years.

In addition to external stressors, the myth that nonprofits must spend every dollar they raise keeps mission-based organizations in the red, threatening their very existence.

The idea that a nonprofit could be saving money may have you wondering:

Is it legal and ethical for a nonprofit to reserve some of its revenue? Not only is it acceptable for a nonprofit to save a portion of its annual revenue, but it’s crucial to its survival and future impact.

Surplus Doesn’t Mean For-profit

In the for-profit world, generating more revenue than expenses are considered “making a profit.” Businesses can then pay out portions of their profit to their shareholders. In the nonprofit world, more revenue means that you’ve generated a “surplus.” Nonprofits can use their surpluses in a variety of ways, but those do not include paying out shareholders.

There’s a common misconception that if a nonprofit doesn’t end the year with a deficit or a zero bottom line, it must be a for-profit organization. However, building up a surplus budget as a nonprofit isn’t only legal — it’s highly advised. Aiming to break even is taking a risky bet that your organization will never encounter a bump in the road, let alone financial hardship. From the State of the Sector Survey, we can see that this rarely happens.

Often perpetuated by well-meaning decision-makers, the myth that nonprofits should spend every dollar is detrimental to an organization’s health and its future. A nonprofit will have a better chance of survival and more meaningful impact if it builds up a surplus budget.

5 Reasons to Build a Surplus Budget as a Nonprofit

Successful and sustainable nonprofits understand the reasons why a charitable organization should build up a working capital cushion with surplus revenue. These reasons include:

1. Unexpected expenses: Building repairs, vehicle repairs, legal disputes, sudden staff departures, cyberattacks, increased insurance premiums, supply chain issues, PR crises, and other unexpected costs can emerge without warning.
2. Loss of funding streams: One of the most common reasons your nonprofit should have a surplus budget is to cover operating costs when a major funder drops out. It’s also crucial to have operating reserves when government grants are delayed or terminated.
3. Economic downturns: When individual contributions start to dry up because of economic turbulence, it can be lifesaving to have funds in the reserve. It’s also important to note that economic downturns are often the times when your community needs your services the most.
4. Strategic investment opportunities: Extra capital isn’t just necessary for unwanted costs. A surplus budget makes it possible to seize opportunities like investing in a bigger property, expanding your services, upgrading technology, or hiring a new employee.
5. Improved credibility: Proof of financial sustainability creates trust with stakeholders that your organization is financially responsible and worthy of ongoing support.

Now that the reasons for generating an annual surplus are clear, let’s explore what a surplus budget might look like.

How to Create a Nonprofit Surplus Budget

The Association of Fundraising Professionals lays out the steps needed to start a financial reserve policy with surplus funds:

1. Identify the purpose: Is this fund meant to cover emergency costs? Or do you plan on using the money to invest in growth opportunities?
2. Determine the dollar amount: What’s your goal dollar amount for the fund? It’s generally recommended that nonprofits reserve at least three to six months’ worth of operating expenses. However, if the fund’s purpose is to invest in growth and long-term sustainability, you may need to save more.
3. Set guidelines for accessing the funds: What specific scenarios warrant the access of reserved funds? Who in your organization is allowed to access them? It’s important to set detailed guidelines to avoid misuse of the fund.
4. Create a timeline: What percent of yearly revenue do you hope to save? How long do you predict it will take to raise the desired amount of funds? Will you host events to raise money for the fund?
5. Consider an investment strategy: With a nonprofit brokerage account, you can invest your surplus funds in stocks, mutual funds, and bonds.
6. Set up monitoring and reporting: Create a monitoring procedure to keep tabs on your fund’s growth. Setting up benchmarks will allow you to stay on track and share detailed reports with the fund’s stakeholders.

Don’t Just Survive — Thrive

It can be discouraging to see that 36 percent of U.S. nonprofits ended 2024 with a deficit. Don’t let your organization befall the same fate. Building a surplus budget for 2025 and beyond is an acceptable and encouraged way for your nonprofit not just to survive, but to begin to thrive.

Working with our experienced nonprofit financial professionals will help your organization build a surplus budget tailored to your mission, meet reserve fund goals faster, and maintain compliance. Reach out to us today to start planning for a stronger financial future.