7 min read
March 25th, 2024
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Nonprofit financial planning is essential to your financial strength and mission success, and the nonprofit budget is like a blueprint for your financial plans.
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Key Takeaways
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Learning how to create a budget for your nonprofit will help you get the most out of your funds while making payroll and keeping the lights on, too!
Complete Nonprofit Budgeting in 10 Steps
1. Understand the Purpose of Nonprofit Budgeting
Since the nonprofit budgeting process requires nonprofit leaders to have a high awareness of expenses and funding sources, the practice offers many functional benefits to organizations. The primary purpose of a nonprofit budget is to create a financial plan, and that plan acts as a roadmap for an organization’s operations, challenges and limitations, resources, and goals.
Read More: How Much Do Bookkeeping & Accounting Services for Nonprofits Cost?
2. Choose a Method and Use a Nonprofit Budget Template
Most nonprofit organizations with a stable financial history and a “business as usual” outlook for the upcoming financial period use incremental budgeting. This method relies heavily on your past performance, previous financial activities, and stable growth trends to incrementally adjust a previous budget for the upcoming financial period.
Beyond basic budgeting, various budgeting methods can be used to achieve slightly different purposes. For example, a nonprofit that wants to drastically cut spending could choose a zero-based or value-based budgeting method that requires each budget line item to justify itself with a reasonable ROI.
Likewise, nonprofit organizations can use contingency budgeting to help with the process of contingency planning. These types of budgets allow nonprofit leaders to look at worst-case and best-case scenarios and come up with various strategies for overcoming challenges and leveraging potential opportunities.
Each of these budgeting methods provides you with a template and process for getting started.
3. Work as a Team to Gather Program Data
No executive director is an island, and neither is nonprofit budgeting. When you begin the process of creating a budget, bring your team together — especially your program directors, fundraisers, marketers, and event coordinators. You will need their input and their own budgets to work from. Each program, event, and campaign’s individual costs will need to be reflected and considered within your organization’s larger budget.
4. Identify Revenue Sources
Before looking at your costs, you will want to list all of your revenue sources and the amount you anticipate each channel to bring in over the upcoming financial period. Be sure to include individual donors, corporate donors, corporate sponsorships, recurring gifts, grants, events, fundraising campaigns, etc.
Look at the funds generated in previous financial periods and consider the current fundraising climate to make a fact-based estimate for the amount of funds you expect to raise. This is what you have to work with.
Don’t Forget to Parse out Restricted and Unrestricted Funds
In addition to listing your revenue sources, be sure to make note of how much of your funds are considered restricted and which portion of your funds is considered unrestricted. This is essential for budgeting in a nonprofit using fund accounting. Without keeping your categories of revenue organized, separated, and tracked, you won’t truly know whether you have enough money to pay your rent or make payroll if you are operating with more restricted revenue than you realize.
5. Know Your Costs
The next step is to list your expenses. It’s simplest to begin with fixed, necessary costs like office rent, licenses, salaries, etc. Next, you can look at discretionary expenses and variable costs. This includes everything from the price of postage to send out mailers, to the snacks and coffee stocked in your breakroom and the ingredients you use to cook meals for the elderly.
Instead of listing every item individually (which can quickly create an overwhelming list), groups individual expenses into categories such as fundraising costs, event costs, materials costs, and operational expenses. (For reference, you can split each category into more specific line items such as breaking event costs into separate event categories.)
6. Expect Costs to Increase
When using methods of budgeting, such as the incremental method, that builds on a previous budget, be sure to account for the fact that costs almost always increase. You will want to account for the impact of inflation (which should normally be around 2% annually but, as we’ve recently observed, can fluctuate significantly).
In addition to accounting for inflation-related cost increases, it’s also important to remember that, as your organization grows and you expect to raise an increasing amount of money, your costs to raise that money will also increase. So, you should look at how much you spend per dollar of revenue raised:
- Cost per Dollar Raised = Fundraising Expenses / Fundraising Revenues
So, if you happen to spend 30 cents for every dollar raised, you will want to account in your budgeted expenses for that 30-cent cost on every dollar of new revenue you expect to generate.
7. Exchange Costs for In-Kind Donations
When budgeting, comb through your expenses to determine whether you have missed any opportunities for in-kind donations that could alleviate your monetary costs.
- Are there any items you currently purchase that you could, instead, acquire through an appeal to your community?
- Are there any professional services you pay for that you could save money on through an in-kind donation program with local professionals?
If you can replace any a few budget line items with in-kind donations of goods or services, you might be able to save your nonprofit a substantial amount of money on both direct and indirect expenses.
8. Budget on a Monthly Schedule With an Annual View
Nonprofit leaders should create an annual budget at the beginning of the fiscal year. However, when you’re focused on granular, day-to-day operations, this big-picture budget can be challenging to use. So, you should divide your annual budget into twelve, separate, monthly budget plans. Divide annual expenses by twelve, so that you save the right amount of money for them every month, and list monthly expenses for their monthly cost.
Each month, take a look at your running totals to make sure you are on track for the year’s spending and earning forecasts. If any revenue or expense numbers don’t look right, you should use your contingency plans to take action immediately to get your budget back on track.
Read More: Top 10 Tips for New Executive Directors
9. Be Flexible
Throughout the year, remember that no budget is set in stone. If they were, that would mean we could all predict the future 100% accurately without fail. This means that your budget needs to be flexible, and you should feel flexible in your budget.
Think of your budget as a somewhat accurate, rough outline of the year’s spending and earnings. It’s a plan for your anticipated financial activities, and doing your best to stick to it will keep you on track to achieve your goals and avoid financial pitfalls. However, you should expect the unexpected and be open to making changes and adjustments to your budget and your spending plan throughout the year.
10. Watch Out for Warning Signs
In a survivable nonprofit, you’ll break even and spend about the amount of revenue you generate. In a financially healthy nonprofit, you’ll have a budget surplus (spend less than you make) to reinvest in your nonprofit or put away in an emergency fund. In a financially struggling nonprofit, you’ll spend more than you earn and have a budget deficit.
Budget deficits are typically unacceptable, except in extenuating circumstances where you have a solid plan to fill in the cash gap and get back on track.
A Cost-Saving Solution: Outsourced Accounting Services for Stronger Nonprofit Financial Management
If the concept of creating a budget, following it, revisiting it, and revising it sounds overwhelming, then it is time for you to get a handle on your nonprofit’s numbers. With a better back office, you can track the financial data you need to improve your budgeting process, your financial planning, and your nonprofit’s financial health.
Consider outsourcing your back office to a bookkeeping, accounting, and CFO services provider with extensive experience in the nonprofit sector. This will save you time and money on in-house costs while also helping you supercharge your back office and shore up your budget for a more successful and, most importantly, more impactful nonprofit future.
