Capitalization Budget

A capitalization budget is a type of multi-year budget that helps organizations plan for large financial transactions in the future, like real estate acquisition, tenant improvements, a new program launch, or a new site opening. Significant investments like these require multiple types of reserves that cannot be funded overnight – they need time to build and grow. The primary way organizations build reserves is through surplus annual operations. This template shows how year-over-year surpluses in net income build net assets over time, in preparation for an investment in the long-term sustainability and impact of a nonprofit organization

Two general reserves – Operating, for regular cash flow needs, and Change Capital, for new program investments – and two real estate reserves – Acquisition, for down payment and construction (includes tenant improvements), and Asset Management, for ongoing maintenance – are included in the template. More can be added depending on your organizational structure and needs. If an acquisition or tenant improvements are not on the table, just input numbers for the general reserves.

Key to understanding capitalization is knowing the true cost of programs. True cost of programs refers to the cost to run the program itself, plus the additional cost needed to cover a portion of general administrative and fundraising activities that serve the organization as a whole. Additionally, when organizations are planning for a significant financial transaction in the future, capitalization – in other words, building assets on the balance sheet – should be considered part of annual administrative activities. If the true cost of running programs includes direct program costs, administrative and fundraising costs, and set-asides for reserves, an organization can plan in advance and be ready to invest sustainably when the time is right.

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