Blog Details
The Surplus Myth: Why Your Nonprofit Should Budget for “Profit”
August 6, 2025
In my experience as advisor to many nonprofit organizations over the years, I have found a tendency by nonprofit leaders and board to budget to a “zero” bottom line (no surplus, no deficit), usually driven by two conflicting objectives – first, the goal of maximizing impact via programmatic spending and second, the reality of having limited resources to accomplish this.
While the above sentiment is understandable, building a surplus budget is’t about abandoning your mission or becoming a for-profit entity—it’s about ensuring your organization survives long enough to fulfil that mission.
The Zero-Balance Budgeting Trap
This thinking—that a non-profit must spend every dollar they receive—is a common, but risky misconceptions in nonprofit financial management.
The reality is that this “zero-balance” mentality can put your organization at risk. When you budget to spend every anticipated dollar, you’re essentially gambling that everything will go exactly as planned, but that is rarely how things work out.
Why This Myth Persists
This misconception often comes from well-meaning board members who believe charitable organizations should never show a “profit” The thinking goes: “We’re a non-profit, so we can’t make money.” But the reality is that what we call “profit” in the business world is a “surplus” in non-profit terms, and it’s not only acceptable, but essential for organizational health.
The confusion stems from the word “non-profit” itself. It doesn’t mean you can’t generate more revenue than expenses; it means you can’t distribute profits to shareholders. Every dollar of surplus must be reinvested back into your mission or set aside for working capital and operating reserve needs yes, there are exceptions, nuances and extreme examples to consider, but for most charitable organizations, building a working capital cushion via annual surpluses is worth consideration.
The Real-World Consequences
Organizations that followed the zero-balance budgeting model are discovering they have no cushion when:
- A major funder pulls out unexpectedly
- Government grants are delayed
- An economic downturn reduces individual giving
- An unexpected expense emerges
For many non-profits, revenue is far less predictable than expenses. If you have a solid expense budget but no financial buffer, you're one funding disappointment away from crisis.
The Strategic Surplus Solution
Instead of budgeting to break even, successful non-profits budget for a modest surplus— (for example, 3-10% of their annual budget). This isn’t money sitting idle; it’s strategic capital that serves two critical purposes:
1. Emergency Reserves: Every organization needs a rainy-day fund. Financial experts recommend non-profits maintain a minimum of 3 months or more of operating expenses in reserve. This buffer allows you to weather unexpected storms without cutting programs or staff.
2. Strategic Investment: Surplus funds can be earmarked for future opportunities—launching new programs, upgrading technology, or expanding services when the timing is right
How to Sell This to Your Board
If your board challenges a surplus budget, it can be framed as a risk management and strategic planning strategy, rather than “hoarding” money.
For example, such a surplus budget could be framed as:
“We’re not keeping money from our mission; we’re protecting our mission’s future. These reserves ensure we can continue serving our community even when funding becomes unpredictable.”
Along these lines, organizations can consider creating separate bank accounts for different purposes (not required, but it can help keep the tracking simpler)
- Operating reserves (emergency fund)
- Strategic reserves (future opportunities)
- Restricted funds (donor-designated purposes)
This approach makes the purpose of each dollar clear and demonstrates intentional financial stewardship.
Making the Numbers Work
Building a surplus requires discipline on both sides of the equation:
Revenue:Be conservative in your projections. It’s better to exceed a modest goal than fall short of an aggressive one. Consider budgeting for “reliable revenue” (see my previous post on this topic)
Expenses: Build detailed budgets with realistic contingencies. Consider what expenses are truly fixed versus variable.
Timing: Implement surplus budgeting gradually. If you’re currently breaking even, aim for a modest surplus in year one and build from there.
Your Organization’s Financial Future
The non-profits that will thrive in the coming years are those that embrace financial sustainability alongside programmatic excellence. This means viewing surplus not as a luxury but as a necessity—insurance for your mission’s longevity.
Remember: You can’t serve your community if you don’t survive. Strategic surplus budgeting isn’t about making money; it’s about making sure your organization can fulfil its mission for many years to come.
The question isn’t whether you can afford to budget for a surplus—it’s whether you can afford not to.
At Quatrro Business Support Services (Quatrro), our non-profit team of experts understand the unique financial challenges facing today’s mission-driven organizations. Our specialized non-profit accounting and advisory services help organizations build the financial resilience needed to sustain and grow their impact. Ready to strengthen your financial foundation? Contact our non-profit team to discuss how we can support your organization’s long-term success.
