How Do We Budget for 2021?

Human service organizations potentially face a tough road ahead. Reserves are the safest way forward when creating your budget for 2021.

It’s that time of year again…time to budget for the coming year. In fact, budgeting is top-of-mind in non-profit organizations with June 30 and September 30 year ends, and COVID-19’s impact is making this a year like no other for leadership responsible for these functions. After all, budgeting involves forecasting 2021’s donations, a difficult job in an average year, and this year is anything but typical.

Right now, the question I am most asked is what contributions will look like in the fourth quarter of 2020 and into 2021. Many human service organizations, especially those that feed, clothe, and shelter, have seen record-breaking donation amounts in the past two months. These organizations care for the most vulnerable in our society, the homeless and poor, and have put these increased funds to good use.

Many have started emergency food pantries on their campus and throughout their community. They are keeping the homeless safe in their shelters and reaching out to the unsheltered homeless still living in camps and on the streets. History shows us, however, that these donation patterns may not last through Fall 2020.  As a new normal is established, giving patterns may change or dry up completely.

Knowing this, human-service organizations must budget wisely by considering the unpredictability of donations in the coming months and years.  At this point, no one can predict with certainty what the 2021 giving levels will be, but we can look to the past to help us forecast the coming months.

Using Current Data and Historic Information to Predict Coming Year Donations

As of June 2020, the US unemployment rate continues to grow, which indicates we are likely entering into a challenging economic time that will continue into next year. Should there be a resurgence of the coronavirus and we encounter another lockdown situation this fall, these challenges could even extend well into 2022.

Knowing this, what are we to do to ensure financial sustainability? First, let’s turn our eyes to past economic downturns and the time it took for charitable giving to recover in those instances.

In 2008, the Great Recession was caused by a credit crunch, with a shortage of banking funds, declined market confidence, and declining lending. After a small rise in charitable giving, there was a significant decrease in nearly every type of charitable giving, nearly a 6 percent drop (adjusted for inflation according to the Giving USA Report released in June 2008).  The 2008 recession was the steepest decline in the history of Giving USA’s surveys, which began in 1956.

The runner-up to the 2008 decline occurred in 1974. Giving USA’s researchers found that it took three years following the 1974 recession for donations to return to 1974 levels (The Chronicle of Philanthropy, “Charitable Donations Fell by Nearly 6% in 2008, the Sharpest Drop in 53 Years” dated June 10, 2009).

According to the Charitable Giving and the Great Recession Report issued by Stanford University in October 2012, the 2008 Great Recession saw total giving reduced by 7 percent in 2008 and 6.2 percent in 2009.  2010 saw giving increase slightly by 1.3 percent and 0.9 percent in 2011. However, overall they were still well below 2007 levels.

History tells us returning to pre-COVID-19 giving levels will take time.

The Path Forward: Stay the Course and Budget to Establish Reserves

During a recent Citygate call, someone shared,

“What is more uncertain is a nonprofit, completely reliant on donations from mostly individuals who give approximately a hundred dollars per gift, when unemployment is now at Great Depression levels¹. I would say uncertainty is very real.”

I could not have said this better myself.

History tells us that it is more important than ever to establish reserves dedicated to future operations and to base budgets and cash flow forecasts using historical data that suggests downturns for the second half of 2020 and into 2021. Yes, it is critical for us to continue to serve the most vulnerable. It is also critical that we protect our ministry from failing. Now is not the time to consider new staff and programs that will deplete reserves to cover the downturn. I am recommending to my clients a minimum of six months of reserves on December 31 to protect sustainability. Too much uncertainty exists to do anything less to protect our staff and those we serve into the coming year.

“It is likely that a full US recovery may take until the end of 2021.”  – Jay Powell

According to Federal Reserve Chairman Jay Powell² with unemployment rates as high as 20 to 25 percent and the potential for a second wave of COVID-19 this fall and winter, it is likely that a full US recovery may take until the end of 2021 (CBS News, Sunday, May 17, 2020).

We are here to help you as we work through these challenging times together.

¹April unemployment was 14.7% – the highest since the Great Depression according to the Department of Labor.

CBO (Congressional Budget Office) estimates the jobless rate to stay above 15% through September – a level not seen since the Great Depression.  The rate will take a long time to fall and it is not expected to dip below 10% until 2021.

Federal Reserve Bank President Eric Rosengreen told CBS on Face the Nation that he believes unemployment will remain in double digits until the end of the year.  It will be a recovery from today but not a full recovery.

²Jay Powell warns US recovery could take until the end of 2021, FINANCIAL TIMES.