How to Handle a Tight Budget Year: Why Investing in Revenue Generation Matters

Nonprofit leaders know that tight budgets are part of the journey, but how you respond to them can make or break the financial health of your organization. A board member recently asked, "How can we justify approving such a big expense when we’re in a tight budget year?" Here’s the key: Not all expenses are created equal. And in lean times, understanding which expenses move the needle most can turn a strained budget into an opportunity for growth.

Categorizing Your Expenses for Better Financial Health

When considering expenses, think of them in three main categories:

1. Income-Generating Expenses These are investments that directly help you bring in more revenue. Whether through fundraising, marketing, or major donor outreach, these expenses contribute to your income stream and should often be a priority, especially in tight budget years.
2. Impact-Generating Expenses These expenses are necessary for mission delivery—funding programs and services that make a direct impact. Though these are essential, they may need to be strategically adjusted if funding is tight.
3. Necessary, Non-Revenue Expenses Think of these as "flush it down the toilet" expenses. These are non-negotiable costs like employee taxes or required licenses that must be paid but don’t contribute to revenue or mission impact directly.

Why Cutting Expenses Shouldn’t Be Your First Move

In a tight budget year, the instinct may be to slash expenses, but this often leads to cuts in capacity that actually make the problem worse. Here’s the counterintuitive truth: A more effective solution is to increase spending where it matters most—on revenue-generating expenses. By investing in the right activities, like major donor prospecting or marketing for donor engagement, you set the foundation for future financial stability.

Steps to Take When Revenue-Generating Funds Are Low

If cash is tight, consider the following steps to reallocate funds toward revenue generation:

• Pause or reduce certain programs temporarily to free up funds.
• Reassign staff roles to focus on fundraising or other revenue-generating activities.
• Dip into reserves if your organization has them available.
• Consider a short-term loan for strategic investments in revenue generation.

Each of these methods can provide breathing room, allowing you to redirect resources to areas likely to improve your financial standing.

Responding to the Board: Explaining Strategic Investments in Tight Budget Years

When board members are nervous about significant expenses during a lean year, remind them that investing in revenue generation is often the fastest route to recovery. Explain that, while it may feel risky, strategic spending on activities likely to generate income is essential to avoid financial stagnation or, worse, an ongoing deficit.

In Summary

1. Prioritize revenue-generating expenses in tight budget years.
2. Reallocate from non-essential areas if needed to free up funds for revenue generation.
3. Communicate to your board that investing in revenue generation is a proactive approach to financial health, even in a lean year.

If your nonprofit is facing tough budget questions, use these strategies to focus on what matters most: your financial sustainability and mission impact.

About the Author

Sarah Olivieri is a coach and trainer for nonprofit leaders, helping them achieve greater impact with less overwhelm. She is the creator of The Impact Method??, a powerful framework that helps nonprofits simplify operations, improve capacity, and build aligned teams. Sarah has over two decades of nonprofit leadership experience, is the founder of PivotGround, and hosts the Inspired Nonprofit Leadership Podcast. She also writes a weekly newsletter with tips for nonprofit leaders, which you can access at inspirednonprofitleadership.com/signup. Learn more about working with Sarah at PivotGround.com.