Step Six: Budgets and Business Plans

There is a common misperception that nonprofits and those who run them do not need to focus on money.  It is, after all, not for profit.  But that notion couldn’t be

further from the truth. Nonprofits can - and should - bring in some money.  How you make that money and how you spend it is what differentiates a nonprofit from a for-profit entity.

When establishing a nonprofit newsroom, you are building a business.  Much of the money will be reinvested in its growth.  You’ll (hopefully) pay salaries to your employees and hire contractors, and you should have a board of directors looking over your shoulder.

Business Plan

Just as anyone starting a business should do, you, too, need a business plan that takes into account your anticipated revenue, planned expenditures, marketing strategy, and future growth.

There are plenty of books and internet guides about writing a business plan, so find one that works for you.  (You may want to start with the U.S. Small Business Administration.)  Just the act of writing your business plan should help clarify your goals and your execution.

In your case, rather than sharing profits with investors, you will generally reinvest that money in the nonprofit’s growth.

Remember, you may be sharing this document with funders in the same way an entrepreneur may show his or her plan to loan officers and potential investors.  Take the advice you receive from these individuals into account and continue to evaluate your business plan.  Flying by the seat of your pants without a plan just won’t cut it.

Budget

In the early days of an enterprise, a budget is a guesstimate as much as it is a guide.  Still, no matter how small your startup, you need a budget.  Not only does it force you to assess the viability of your project and think about new and

continuing revenue sources, it also helps you define the scope of your work, set priorities, and figure out whom you can afford to hire.

Your budget will also help in your pursuit of grants and donations.  Donors want to see how you plan to spend the organization’s money and be assured that you are planning ahead by thinking about future sustainability. They will often ask for your annual operating budget and sources of income. 

As you budget, key areas of expenditures to include are:

• Salaries and benefits.
• Rent and supplies.
• Contractor or freelancer expenses.
• Travel.
• Overhead, such as insurance, sponsor fees.
• Equipment.
• Marketing.
• Fundraising costs.

News startups are experimenting with many different revenue streams:

• Grants from philanthropic foundations.
• Donations from the general public.
• Memberships, using the public broadcasting model.
• Corporate sponsorships, also in the public broadcasting model.
• Advertising (a note on the tax consequences below).
• Registrations for training workshops and events or tickets to fundraising galas.
• Fees from syndication of your work, allowing others to publish it.
• Subscriptions from newsletters or printed publications.
• Consulting or contract work for others.

It is not recommended that you attempt all of these at once.  In fact, we recommend two or three to start.  Your market research, which will help you build your business plan, should give you an idea which approaches may work best for you. 

For example, you may decide to start by applying for foundation support, since you generally will not have enough readers to justify a donation model.  Then, once you market effectively, you may be able to build a membership base that could help sustain the site.

Tax Considerations

There are two key provisions of current IRS code that may concern nonprofit news operations:

First, organizations with 501(c)(3) status are allowed to accept advertising, however, if a group earns more in advertising than the expenses related to the publication, that excess amount is considered Unrelated Business Taxable Income by the IRS, and therefore is not exempt from taxes. In other words, if you make more by selling ads than it costs to produce your news site, you will generally be taxed on that extra income as if you were a business.  So you will need to have a handle on your advertising income.  For example, currently you would pay 15 percent on the first $50,000 of net profit.  Earn between $50,000 and $75,000 in net profit, and your rate is 25 percent.  More than $75,000 and the rates are at least 34 percent, if not more.  More details can be found in IRS Publication 598, and rates are found in the Internal Revenue Code.

Second, an IRS rule designed to ensure the public supports your endeavor requires that at least one third of your total support come from gifts, grants, contributions, membership fees, and other public means.  The IRS requires organizations to measure this public support over a five-year period.  That means you’ll need to constantly remain aware of how much you receive from private individuals, as compared with advertisers, sponsors, or other sources.  You will need to report these numbers on Schedule A of Form 990.  More information can be found in these IRS instructions.

Bookkeeping

You should select bookkeeping software that’s appropriate for your budget needs.  Initially, choose something simple, that any bookkeeper would know — for example, QuickBooks. Any software should allow you to create spending categories that correspond to your proposed grant budgets and also let you view quick snapshots of your current rate of spending. 

There is no need to create a budget template from scratch - the nonprofit world offers many to get you going. 

Annual Filing Requirements

By May 15 of each year, 501(c)(3) organizations are required to file annual returns for the previous year.  Similar to personal income tax returns, nonprofits file either a Form 990 (if your gross receipts in the previous year were $100,000 or greater), or Form 990-EZ (for those with gross receipts below $100,000).

Be mindful that unlike with personal income tax returns, 990’s are public documents available for anyone to inspect.  Among the expenditures you will be required to disclose are:

• Compensation to your officers, directors, trustees and key employees.
• The five highest paid employees and contractors earning more than $100,000 annually.
• Donors who gave more than $5,000.

Your budgeting will help you complete Form 990, as you must also indicate major categories of revenue and expenses.  As you generate more revenue, you may need a full-time bookkeeper and you may want to consider an accountant who specializes in nonprofits.  Some states require that an auditor conduct a review of your finances if your revenue exceeds a certain amount.  For example, Minnesota’s revenue threshold used to be $350,000, but now is $700,000. 

As with lawyers, you may be able to obtain this assistance for free by tapping into a program offered through an accounting association or locating a specialist willing to donate his services for free or at a steep discount.  Perhaps a member of your organization’s board of directors can give you a contact.  In addition, if you are an online nonprofit news operation, you can obtain assistance from the Online Media Legal Network at Harvard University.

Keep in mind that running a 501(c)(3) is a matter of public trust, and the IRS is charged with ensuring exempt organizations are operating with that interest in mind.  We recommend you consult with trusted legal and accounting professionals to avoid running afoul of federal and state tax regulations.