Uncertainty in budgeting: How to make a financial plan when you don’t know what’s coming

Every plan has a horizon, a point somewhere in the future where the details start to blur. Maybe it’s a week from now, maybe a year, but the horizon is there. 

On this side of the horizon, close to you, things are in focus. You can see what needs to happen, when, why, and how it should unfold.

On the other side, further away, there is mystery. You can’t say for sure what will happen, the scale of the unfolding, or which people and resources inhabit that space.

In art, the border between clarity and mystery is called the vanishing point. It’s the place where everything you can see clearly disappears.

Two parallel lines, like the sides of a road, seem to meet in the distance. You believe the road continues, but you can’t see it with your own eyes. You can’t know for sure until you get there.

Uncertainty is stressful

The vanishing point is unsettling.

People don’t like uncertainty. We’d rather know something horrible is about to happen than worry that something bad might be coming our way.

We especially don’t like financial uncertainty. This is a challenge in nonprofit life, where money worries are a constant. From personal concerns about financial security to the chronic challenges that nonprofit organizations face, there’s always a lot at stake.

It’s not surprising, then, that financial planning can be a stressful part of nonprofit management. Budgets are all about money and uncertainty. 

Seeing beyond your vanishing point

For most managers, financial planning and budgeting are about more than numbers. Every dollar that comes in represents a relationship with a donor, hours spent on fundraising. Every dollar spent is a program impact, a staff member, a beneficiary in the community. Budgets aren’t math; they’re alchemy. 

Most nonprofits, by definition, don’t know what their financial futures hold. You can’t see beyond your vanishing point: Will you have those funds you need in Q3? Will the cash you need to pay the bills in Q4 come on time? Is this the year your biggest donor moves on to new projects? What if that new government funding program arrives? 

This uncertainty makes it hard to plan, to just get on with the good work.

In order to move forward, you decide what you think is going to happen. Some plan is better than no plan, after all. 

Best case vs. worst case budgets: Why simple isn’t always better

When you create a budget or a financial plan, you’re essentially making a prediction, a forecast, a bet. You’re saying “here’s what we think is going to happen, and we’re going to act accordingly.”

Many young nonprofits make either a “best case” or a “worst case” plan. Those are the two simplest plans to make. 

In the best-case plan, they assume everything they want to happen will happen. Every grant and major donation they need arrives, even if they have no idea where or when or how those funds will be found. 

In a worst-case plan, nonprofits assume they will only have what they have right now. No new support is found; the goal is to maintain, not to grow.

The downside of the best-case scenario is that you may be caught by surprise if you don’t raise the money you expected; you may need to cut programs or go back to square one. The downside of the worst-case scenario is that you don’t build resilience or prepare for any kind of growth; you operate with a scarcity mindset. 

So what do you do? You want a budget that pushes your vanishing point further into the future, one that offers as much clarity as possible.

Luckily, there is a formula. 

Budgeting for the unknown

If you want to budget for the unknown, you just need to do a tiny bit of math. And think like a poker player. 

In Thinking in Bets, decision-making consultant and former poker player Annie Duke walks through the steps to building a budget when the future is uncertain. She uses a method called weighted averaging, which is a game-changer if you’ve been struggling to put your budget together. 

1. Start with your fundraising plan

You probably have some idea where your money will come from this year. Things might change, and you’ll definitely want to take advantage of real opportunities that arise. But even the most general fundraising plan will describe what mix of your money is likely to come from sources like these: 
> Government grants and transfer payments
> Foundation grants
> Corporate sponsorships
> Major donors
> Individual donor campaigns

2. Put your fundraising plan into your budget

Your fundraising plan and the revenue section of your budget should look very similar. 

Create a line for every major revenue source in your budget. This might be a specific donor, like “Fred’s Family Foundation Grant”, or a campaign such as “Year-End Membership Renewals”. 

3. Assign probabilities

Assign each major revenue source a likelihood of success score. 

You probably already do this in your head. When you know a grant is coming, you think of the funding as 100% guaranteed. When you know you’ve been turned down, it’s 0% likely to happen. When a grant request could go either way, it’s 50%. The fancy name for this percentage is the likelihood of success. 

In the beginning, your probabilities will be estimates. You may have just a few options, such as: guaranteed (100%); probable (75%); possible (40%); and long shot (10%). If you have years of experience under your belt, you can pull from old data. As time goes on, update and refine your options.

4. Calculate your budget amount

Here’s where the math comes in. 

Start with the expected amount of a revenue item. This is the dollar amount you will receive if your fundraising ask is successful. It could be the amount you received last year, the donor’s average grant award, the amount you asked for in your proposal, etc.

Multiply that expected amount by your likelihood of success score. That’s the percentage chance that your fundraising efforts are successful. You assigned that in step three. 

That gives you the budget amount for your budget.

Here’s the simple formula: 

Expected value X Likelihood of success = Budget Amount

Here are three examples of the formula in action: 

Example 1: A foundation has sent you a letter pledging $100,000 this year. You know these funds are coming, so you say it’s 100% likely. You put $100,000 in your budget.

Example 2: One of your major donors has offered to introduce you to a friend with similar interests. They’ve suggested you ask for $10,000, knowing that their friend gives out several of these donations each year. You think the donation is likely to come, but it’s not guaranteed. This type of introduction leads to a donation three out of four times, so you say it’s 75% probable. You put $7,500 in your budget.

Example 3: There’s a new government funding program coming next summer. Your organization is a perfect fit for the program, but there is an election taking place this spring. There’s a good chance a new government would cancel the program, and you estimate a 25% likelihood that it all comes together. Your contract would be worth $100,000, so you put $25,000 in the budget.

5. Build your fundraising work plan around your budget amounts

A budget is more than numbers to add and subtract a few times a year. It’s also your to-do list; it reveals what you need to do to raise money and what you need to do to spend it with impact. 

Build your fundraising work plan around your budget amounts: the more revenue each item is expected to bring in, the more of a priority the associated work becomes.
Here’s how Duke explains it:

Say there is a $100,000 grant that you expect to win 25% of the time (one in four tries). The expected value of this grant is $25,000. Compare that to a $200,000 grant with a 10% chance of success (one in every ten applications). Even though the second grant is double the size, the expected value is only $20,000. The first grant should be the priority. 

Now compare that first grant to a $50,000 sponsorship where you know the funder and match their interests perfectly. With a 70% chance of success, that smaller sponsorship is worth $35,000 in your budget. It’s the best option of all. 

The cure for uncertainty

The more accurate your predictions become, the more confidence you feel staring into an uncertain future. We drive new roads all the time, secure that the tarmac continues beyond the horizon. That confidence — not knowledge — is the real goal.

You can’t ever really know the future. You can predict. You can trust. You can have faith. But you can’t know. Because the moment you reach the horizon, a new vanishing point appears. And the new future that arises is just as uncertain as the last one.

So instead, you get comfortable with uncertainty. You recognize that it’s natural, inevitable. And instead of making it go away, you make a plan. You figure out what you need to do next.

Soon, uncertainty starts to feel a whole lot like opportunity, and that vanishing point an invitation. The horizon beckons.