It’s time to prepare your 2025 budget. Unlike most years, we’re in a unique phase in the economic cycle. Interest rates are beginning to fall, financial markets have been volatile, and it’s a presidential election year, all of which can impact donations.
It’s easy to understand how economic and equity market conditions can impact charitable giving, but political uncertainty could be a factor as well. Whatever the outcome of the election, certain segments of your donor base will likely be affected, even if the actual economic impact is minimal. Concerns about what might happen could lead to a period of deferred donations as your members take a wait-and-see approach.
That’s on top of the fact that total donations to nonprofits, including religious institutions, have been stagnant for several years. According to Giving USA’s annual report on philanthropy, charitable giving to religious organizations in 2023 decreased 1% after being adjusted for inflation. Meanwhile, churches are facing higher costs for goods, labor and maintenance.
In an economic cycle with so many moving parts, revenue growth is hardly a given, which is why prudent budgeting is even more important. So, how can your institution prepare its budget in the face of these multiple headwinds? Here are some best practices you can use as a guide for your 2025 planning.
Manage Interest Rate Costs
With the Federal Reserve expected to go through multiple rounds of interest rate cuts, money market rates will also fall. If you have debt maturing or a rate reset coming in the next year, your interest expense could rise dramatically, and those higher payments could strain your margins. Review your loan documents to determine when your fixed loans are due to expire and what the implications would be in the event of a rate reset. Forecasting that shift well ahead of time will help you budget accordingly to absorb that cost increase. That could include deciding where to cut discretionary expenses to offset a significant increase in interest expenses.
Laddering the duration of your fixed-rate investments is another best practice. By staggering the duration of your fixed-rate maturities, you’ll maximize your returns and preserve liquidity while mitigating interest rate risk.
Budget Below Previous Results
Budgeting below last year’s receipts is a tactic we regularly see our top-performing clients use, and that’s the case in both good times and bad. Some organizations we work with include in their bylaws the requirement that they will always budget 90% of last year’s actual revenue. Doing so provides a bit of cushion. By building in margin to cover a dip in revenue, you may not have to cut costs that are essential to your mission, such as programs or staff.
Prepare for the Unexpected
It’s also wise to budget for unanticipated expenses. That’s especially true for facility-heavy institutions as maintenance issues tend to crop up more. That means incorporating fixed-asset replacements into the budget. While some institutions raise donor funds specifically for such projects, that may not be a viable option in an uncertain economic environment. It’s always wise to maintain some undesignated reserves; we recommend starting with two months of operating cash and budgeting to add slightly more every year.
Certain assets have an expected life span, and you can incorporate that timeline into your core operating budget by building out a schedule for the useful life of your fixed assets. For example, if an HVAC system has an expected useful life of 30 years, a best practice would be to set aside 1/30th of the cost of a new unit into your budget every year. If you’ve been regularly budgeting for fixed asset replacement, the sudden need for repairs or maintenance won’t put you in an unexpected bind. If you haven’t, you might need to increase the amount you set aside to be prepared. Making this practice a core part of your budget reduces the impact of an unforeseen expense.
Your Time to Shine
We’re in a period of economic volatility and financial uncertainty. But these are also the times people engage in discussions about faith and seek spiritual counsel. If you’re following sound budget management practices, more opportunities to serve will present themselves, and your organization will be financially prepared to take advantage of them.
