The Benefits of Multi-Year Budgets

I have been a strong advocate of year-end budget projections that are updated monthly throughout the year. These budget projections help nonprofit organizations to keep track of their progress while providing an opportunity to react to changing circumstances in real time. The impact on the psyche is immediate and beneficial. This impact is enhanced when paired with multi-year budgets as shown in our Multi-Year Budget Financial Dashboard Template.

For evolution and change to be fully appreciated they need to be viewed through a multi-year lense. When viewing only one budget year a time, it becomes hard to see how an organization is evolving and how its programmatic goals and activities will be reflected in future budgets. Pairing the current year budget with 2 to 3 years of “out-year” forecast budgets allows observers to see the journey, viewing the organization’s goals and the impact of its evolution.

Consider using a “1-2” or “1-3” budget planning tactic. 1-2 and 1-3 budget planning tactics pair the current budget with a 2 to 3 years of out-year forecast budgets. Format your dashboard presentation to highlight the current budget with columns sitting to the far right showing forecasted budgets for the next 2 to 3 fiscal years. For example, a proposed budget for the 2023 fiscal year would be paired with forecast budgets for the 2024 and 2025 fiscal years (and with FY 2026 if showing forecast budgets for the next three fiscal years).

To give multi-year budgets perspective, build the out-year forecast budgets based on three but no more than five key budget assumptions and highlight why these key budget assumptions are significant “game-changers” for your organization. Thoughtfulness and inclusiveness are important when developing key budget assumptions. Be thoughtful in identifying goals for your major drivers (growth, new services, expanded capacity) and include the resources needed to reach these goals (new grant funding, increased contributions, expanded service and registration fees, new staff positions, etc.). Be inclusive by seeking out input not just from senior management but also from staff, Board and volunteer leadership, as well as funders and service recipients.

Avoid over-complicating the out-year forecast budgets with small changes like anticipated inflation factors. By keeping the focus on the key budget assumptions, you will be able to paint a picture that displays and highlights important changes over the multi-year period. This will also help visualize how meeting goals and expected outcomes will impact the organization’s resources, bottom-line, and financial health.

Planning Tip – Multi-year budgets can be a valuable strategic planning tool, but they can also generate negative reactions if not put in a proper context. Seek out comments and solicit input on expectations and content for multi-year budgets and adjust your messaging and target your communications. Explain to the Board that the out-year forecast budgets are not presented for Board approval, but rather to illustrate the organization’s future goals and expectations and the capacity benchmarks that need to be met. Explain to senior management and staff that multi-year budgets are an opportunity to stretch planning and demonstrate how efforts today will pay off in the future.

To add perspective to multi-year budgets, include budget projections that are updated monthly throughout the year. We live in a world where unexpected change and disruption can happen at any time and happen quickly. Current year budget projections will show if your organization had to pivot away from the approved current year budget and realign resource allocations.  

However, do not plan to adjust out-year forecast budgets immediately. Multi-year forecast budgets are there to show future goals and expectations. These will be updated with the next fiscal year budget preparation cycle but keeping the forecast budgets as is will help all to see and appreciate that future goals and expectations might need to be tempered, adjusted and reset.

To help visualize, customize, and apply this multi-year budget approach, we have made a Multi-Year Budget Financial Dashboard Template available for download.