How to Conduct a Budget Impact Analysis (Step-by-Step)

Evaluating the financial impact of a change, such as launching a new program or using a large grant, can be challenging for your nonprofit without an effective budget impact analysis.

But what exactly is a budget impact analysis, and how do you do it like a pro? Join us to discover these and more in this guide.

Pro Tip: Martus fits the bill nicely as a budget impact analysis tool. As a dedicated financial management software for nonprofits, Martus helps you model various scenarios to understand the opportunities and risks of a given change.

You can also create detailed forecasts to assess whether a certain change is financially viable before you make a life-changing decision. 

Book a customized Martus demo now to see our budgeting solutions in action. 

What Is Budget Impact Analysis?

A nonprofit budget impact analysis (BIA) is a financial assessment that estimates how a specific change, such as a new initiative, funding source, or policy, will affect an organization's overall budget. 

The process projects both the additional costs and potential revenues associated with the change to uncover its net impact on financial sustainability. 

Budget impact analysis helps you make strategic decisions in a nonprofit. Your leaders can understand the budgetary effects of expanding programs, adjusting staffing levels, or launching a new service.

By analyzing these impacts early, your nonprofit can make informed decisions that align with the available resources, your mission, and long-term financial goals. 

The Importance of BIA in Decision-Making

Nonprofits usually operate on tight margins where every change in funding or expenses needs thoughtful forecasting. BIA is important in decision-making for various reasons:

1. Supporting Data-Driven Decisions: A BIA provides clear, evidence-based forecasts that allow you to assess whether a change is fiscally viable. You are able to rely more on tangible data rather than guesswork to prioritize programs or  initiatives that provide the biggest impact with the available resources.
2. Enabling Scenario Planning: Your organization can model different scenarios to understand the risks and opportunities posed by various financial strategies. With proper scenario planning, you'll be more ready to face financial surprises, such as overspending or shortfalls in revenue, and their impact. 
3. Strengthening Board and Grant Justifications: A well-documented BIA shows due diligence when presented to your board and funders. You show that your organization has carefully considered the financial effects of a certain change, which boosts credibility and the likelihood of continued support. 

Common Methodologies Used in Budget Impact Analysis

Budget impact analysis uses structured and thoughtful approaches to estimate how changes affect a nonprofit's budget. 

Let's check out some common methods. 

1. Static Models

A static model provides a snapshot of the financial impact of a change at a single point in time, usually one fiscal year. 

The model is simple and helps you plan in the short term. For example, you can use it to analyze the effect of adding a part-time staff member in the current fiscal year. 

2. Dynamic Models

A dynamic model looks at how the financial impact of a change changes over time, usually over several years. 

Dynamic models help with long-term planning or applying initiatives in phases. For example, you can project the five-year cost and revenue impact of a new food provision program. 

3. Cost-Per-Unit and Per-Period Models

With the cost-per-unit method, you calculate the cost of a change based on a single unit, which could be an event, service, or person. 

The model helps you estimate budget impacts when scaling up or down. Let's say you spend $50 to feed one beneficiary per week. If you plan to serve 100 more people, the added cost will be $5,000. 

If you use the per-period model, you break down the cost of a change based on time periods, usually monthly, quarterly, or annually.

The per-period model helps you align your projections better with cash flow and budgeting cycles. Assuming you have to incur rent for a new office at $2,000 per month, you'll have a total annual cost impact of $24,000. 

Note: You can use these methods together or separately, depending on the complexity of the change being analysed. 

Key Components of a Budget Impact Analysis

Budget impact analyses typically have several elements, regardless of the model you use to derive the estimates. These can include:

Time Horizon

You can define the period over which the analysis will happen. The duration is typically 1 to 3 years, which helps you forecast short- and medium-term impacts and align with most nonprofit budgeting and strategic planning cycles. 

For instance, a senior citizen center planning a new outreach program might model costs and revenue impacts over three years to see if the initiative will be sustainable. 

Baseline Cost Assumptions

You can establish a clear picture of your current spending and revenue before you introduce a change. 

These parameters become the baseline for comparing and measuring the financial impact of the changes. 

For example, before hiring new staff, you can outline your current personnel costs, caseloads, and service levels. 

New Initiative Costs and Funding

For this component, you note all the expected expenses and funding sources related to a certain change. You'll want to include one-time startup costs and ongoing operational expenses. 

When rolling out a new outreach program, for instance, you can face the following:

• One-time training materials costing $3,000
• Ongoing staff salaries of $50,000 per year 
• A new grant covering 75% of the new costs

Sensitivity Analysis

You can use this element to test how results change under different assumptions to help account for uncertainty in aspects such as funding amounts and increased expenses. 

What would happen if a new program grows its participants faster than expected? Will staffing costs increase as a result? What would happen if a key grant reduces? 

Having these elements in your analysis ensures you get a well-rounded review of potential financial outcomes to help you make smarter decisions amid uncertainty. 

How to Conduct a Budget Impact Analysis

Here's how you can perform a nonprofit budget impact analysis in a few easy steps.

1. Define the Scope of the Change: Identify the change you want to analyze. Some common ones include launching a new program, hiring more staff, and adding a new revenue stream. 
2. Identify the Affected Budget Areas: Work with your finance and program teams to identify the parts of the budget that will experience an impact. These could be nonprofit expense categories such as program costs, administrative expenses, and fundraising costs. Revenue could also be affected. 
3. Estimate Incremental Costs and Revenues: Calculate the additional (or reduced) expenses and any expected revenue directly tied to the change. 
4. Model Short-, Medium- and Long-Term Impact: Forecast the financial effect of a change over a 1 to 5 year period using a static or dynamic framework to understand immediate, medium-, and long-term implications. 
5. Present Result to Leadership: Once you are done, share a clear summary of your findings with your top leaders or the board to help them make informed decisions driven by data and evidence. Include scenarios and potential risks. 

Pro Tip: An effective BIA calls for all departments to collaborate. The finance team brings cost accuracy, while the program team ensures you are operationally realistic since they have more context-specific knowledge. 

Tools for Effective Budget Impact Analysis

Speaking of effective budget impact analysis, it's best to use a nonprofit-oriented financial management platform. 

You can use basic BIA solutions like spreadsheets, but they usually lack visibility, version control, consistency, or collaborative access. 

In place of spreadsheets, you can use Martus, a nonprofit-specific financial management platform, as your BIA tool. 

Martus can help you do the following: 

• Compare Scenarios: You can compare multiple scenarios side by side with Martus. Martus allows you to build and view different budget scenarios where you can see how changes in funding, staffing, or program expansion affect your overall nonprofit budget. 
• Track Program-Specific Costs and Outcomes: With Martus, you can tag and monitor expenses by department or program, which makes it easy to identify the financial impact of specific initiatives. You can understand which programs are sustainable, where costs rise, and how each change contributes to your mission and budget. 
• Align Impact Planning with Grant Requirements: Martus allows grant-based budgeting so you can track how you allocate and spend restricted and unrestricted grants. You can align forecasted outcomes with specific grant budgets, making it easier to plan, report, and show your grantors that you are financially accountable. 

Martus gives you the structure and visibility that often lacks in spreadsheets, so you can manage complex financial changes and budget more strategically. 

Gain financial clarity and optimize your budgeting process with Martus today.

Practical Applications of Budget Impact Analysis

As a nonprofit, you should look at BIA as a decision-making tool that you can apply across the organization rather than just a routine financial exercise. 

Here are some real-world nonprofit examples where you can apply BIA:

1. Evaluating a New Grant-Funded Position

When planning your HR budget, you might have to hire for a new role based on a grant. A BIA helps you estimate the total personnel costs (such as salaries and onboarding), and assess the effect after the grant ends. 

The short-term strain here can be upfront recruitment and training expenses. 

The long-term benefit can be an increased capacity to serve beneficiaries better and the potential to attract future funding once you show a commendable impact. 

2.  Expanding a Seasonal Program

Let's say you want to triple the size of your food program. BIA helps project the added costs of food, staffing, and logistics. 

You can also model different donation levels or participation rates among beneficiaries. 

Your short-term strain will be higher upfront costs during peak months. The long-term benefit can be broader community outreach and stronger donor support. 

3. Adding a Tech Platform to Reduce Admin Time

You might be exploring a new donor management or volunteer scheduling platform to reduce the amount of time you spend on repetitive administrative duties. 

A BIA will help you compare setup and subscription costs with the time savings and operational efficiency you expect. 

The implementation and training costs for the new tool will be a short-term strain. Your long-term benefit can be reduced manual work, better data tracking, and the potential for your staff to focus more on delivering your mission. 

Common Challenges and How to Overcome Them

While budget impact analysis is a powerful financial management solution, you might face the following challenges. 

• Missing or Inaccurate Baseline Data: If your starting budget numbers are inaccurate, your predictions will also be incorrect and unreliable. You'll want to work closely with your finance team and use nonprofit financial management software. Your team can use Martus to pull accurate and updated actuals from your integrated accounting software. 

• Difficulty Modeling Long-Term Outcomes: Forecasting costs or impact over several years can be difficult and uncertain, especially when funding and beneficiary participation rates are unpredictable. Scenario planning can help you showcase different outcomes. You should involve program staff who understand how initiatives evolve over time to make planning the scenarios easier. 

• Stakeholders Not Aligned on Assumptions: If your top leadership, finance, and program teams use different assumptions, there will be confusion and delay in making decisions. Bring your cross-functional teams into the process early and use clear documentation to track assumptions such as cost-per-unit and increase in participants.

Frequently Asked Questions (FAQs)

We'll close the discussion with common questions professionals usually have regarding nonprofit budget impact analysis. 

What Is the Ideal Time Frame for a Budget Impact Analysis?

The ideal time frame or horizon for a BIA is 1 to 3 years. 

This duration balances between short-term planning (such as assessing immediate costs, funding cycles, and staffing changes), and long-term impact (such as growth of new programs, sustainability after a grant ends, and return on fundraising investments. 

Who Should Be Involved in Creating a Budget Impact Model?

Creating a budget impact model (BIM) in a nonprofit should be a collaborative effort featuring the CFO, program directors, CEO, and program staff. 

What Skills Are Required to Perform Budget Impact Analysis?

To perform an effective BIA, your team will require skills such as data analysis, collaboration, analytical reasoning, budget forecasting and projections, and scenario modeling. 

Attention to detail and familiarity with nonprofit accounting software and financial management tools like Sage Intact and Martus are also important. 

Can AI or ML Improve Budget Impact Forecasting?

Artificial Intelligence (AI) and machine learning (ML) can improve how your nonprofit forecasts and analyzes the financial impact of your decisions. 

AI can analyze historical data on changes in key aspects like spending trends to predict future costs and revenues more accurately. 

Machine learning can model scenarios at scale to show how your budget might respond to changes in programs, expenses, or funding levels in real time. 

Conclusion

When your nonprofit embraces effective budget impact analysis, you can make smarter decisions, communicate more clearly with different stakeholders, and manage your finances better. 

BIA supports evidence-based forecasts, modeling different scenarios, and testing different assumptions to see how a certain change affects your budget, mission, and long-term financial goals. 

Your organization can use Martus, a nonprofit-dedicated financial management platform, to perform repeatable and reliable budget impact analysis. 

Martus helps you compare scenarios, track program-specific costs and outcomes, and align Impact planning with grant requirements related to various changes. 

Streamline your budget impact analysis with Martus now.