A nonprofit budget is a financial plan which outlines how a nonprofit plans to spend its money. It is important for a nonprofit to have a budget in order to track progress and success, and to make sure that resources are being used efficiently. A budget should be reviewed on a regular basis and be flexible so that it can adapt as circumstances change.
What Is A Nonprofit Budget?
A nonprofit budget represents what your nonprofit expects to spend (expenses) and earn (revenue) over a specified time period. Budgets are useful for projecting how much money you will need for a major initiative, for example, buying a facility, hiring a new employee, etc.
Budgets also help track whether you are on target or not. Example budgets include: yearly (annual or operating) budgets, cash budgets, capital budgets (for major assets, such as equipment, buildings, etc.) and proposal budgets (for fundraising). Similar to the breakdown of the chart of accounts into functional areas and programs, a nonprofit budget must also be broken down by the same areas.
In simple terms, your budget is a financial plan for the year. It quantifies your annual strategy and used to communicate with your organization’s board, staff and funding sources.
Nonprofit Management Tool
Management tool measures progress towards goals:
- Monthly review of revenue and expenses
- Creates accountability by department and for the organization as a whole
- Separates program budgets from special budgets for capital projects or fundraising events
- Budget must be created from the bottom up to reflect each program’s individual fiscal requirements
Creating Your Budget
Before you get started, you need to have a strategic plan. This is the basis for ensuring your budget aligns with your plan. To get started, you can use financial reports to provide you with data that can guide you through the budget creation process.
- Review current and prior year actual income and expenses
- Budget must be split by program and department
- Review grants
- Review with program directors
- Factor in new salary positions, cost of living increases (salaries), increases in overhead, additional program needs
- Budgets should be balanced – Revenue and expenses are equal
- Budget must be entered on a month to month basis to account for variables for time of year
- Determine if your budget incorporates an allocation of indirect costs to programs
- Must be approved by treasurer, finance committee, grantors and board of directors
Nonprofit Budget Types
In December, 2017, the Financial Accounting Standards Board (FASB) issued changes for simplifying classification of nonprofit net assets. While the nonprofit budget is not subject to these standards, it will be easier if these changes are implemented to remain consistent moving forward. To summarize, contributed revenue, such as donations, contributions and grants, are simply classified as contributed revenue with or without restrictions.
- Net Zero Budget: Revenue = Expenses – Necessary for Grants. Spend it or lose it.
- Net Operating Loss Budget: Expenses exceed Revenue: Loss is covered by prior year net asset carryover, or unrestricted revenue.
- Net Surplus Budget: Revenue exceeds Expenses. Surplus must come from unrestricted revenue or grants.
Tips to Create a Nonprofit Budget
Step 1: Determine what your timeline is
Use a timeline when creating a nonprofit budget so that goals are realistic and time-based. Having a timeline also allows you to track progress and make necessary changes.
Step 2: Agree on what the goals are
Agree on goals before creating a nonprofit budget, in order to ensure that the budget is actually useful. Having clear and achievable goals will help you achieve your organization’s objectives more quickly and efficiently.
Step 3: Define what your nonprofit’s revenue streams are
When creating a budget for a nonprofit organization, it is important to take into account all possible sources of revenue. This includes money from grants, donations, sponsorships, and other programs. Knowing how much money your nonprofit is making can help you better allocate resources.
Step 4: Create supplier and partner relationships, and set costs
Supplier and partner relationships can help with creating a nonprofit budget by providing ongoing budget-to-actual reports and helping with the preparation of mid-year budget revision.
Step 5: Identify all of your expenses
Identify all expenses when creating a nonprofit budget in order to have an accurate financial picture of the organization. This will help prioritize spending and ensure that the largest expenses are accounted for.
Nonprofit organizations need to identify all expenses in order to maintain financial health. The largest expenses will have the most impact on a nonprofit’s budget, so it is important to have accurate numbers for them. Common expenses for nonprofits include salaries for staff and costs for office rent, electricity, internet, software subscriptions, and travel. Creating a budget that doesn’t rely on grants is important in order to maintain financial stability. Anticipating and accounting for large expenses such as the cost of hiring new staff before tackling smaller expenses is also crucial.
Step 6: Develop a draft income budget
Develop a draft income budget when creating a nonprofit budget because it allows you to ensure that the budget meets your program and organizational goals. By starting with expected income and then calculating expenses accordingly, you can create a balanced budget that will help maintain your organization’s financial stability.
Step 7: Develop a draft expense budget
Use a budget when creating a nonprofit organization because it will help you plan for the future. The budget will act as a roadmap for your nonprofit, and will help you make decisions about how to allocate your resources. Additionally, the budget will help you track your progress and ensure that you are staying on track to meet your goals.
Step 8: Figure out your cash flow projection
Determine cash flow projection when creating a nonprofit budget in order to ensure that there will be money available when needed. Cash flow projections should be based on program budgets, and if an organization’s expenses outpace its revenue, it may need to build up a large cash surplus. Board members should have a direct role in developing cash flow projections, and the projections should be reviewed carefully to ensure accuracy.
Step 9: Separate operational from capital budget
Keep operational and capital expenses separate when creating a nonprofit budget in order to maintain financial health. By doing so, it allows for better tracking of where money is being spent and more accurate budgeting in the future.
Step 10: Simplify- don’t overwhelm
The budgeting process is important for a nonprofit organization because it can help simplify their finances and the key to financial health. If the budgeting process is too complicated or overwhelming, it can be difficult to stick to and may cause more financial problems. By starting early and being clear about what the budget is for, nonprofit organizations can avoid making assumptions that could lead to financial difficulties.
Step 11: Keep on top of the numbers
Set organizational goals before discussing budget numbers with their boards. A budget should be preceded by or accompanied by set organizational goals, which will help nonprofits understand the financial implications of their proposals. It is important for nonprofits to keep numbers in context, by referring back to goals endorsed by their boards. A nonprofit budget should be revisited and adjusted monthly to match actual performance. Changes to the budget should be made in order to stay on track with strategic goals.
Step 12: Monitoring the budget throughout the year
Monitoring the budget is important in order to keep track of their strategic plan and how they are performing. Additionally, monitoring the budget allows for adjustments to be made so that the nonprofit can stay on track with their goals.
It is important to monitor the budget throughout the year in order to keep a close eye on your nonprofit’s strategic plan and performance. Comparing budget vs. actual results allows you to stay on top of variances and make changes as needed.
Step 13: Get the right amount of detail in
It is important for a nonprofit to have a clear mission and goals in order to create an effective budget. The budget should be detailed and specific, including information on expenses, revenue, and expenses by category. Monitoring the budget throughout the year can help ensure its effectiveness.
Step 14: It’s a team effort
Involve a team when creating a nonprofit budget because it allows for better clarity and accuracy. A team can help to ensure that all aspects of the nonprofit’s budget are considered. This includes expenses, revenue, cash flow, and non-monetary contributions. Monitoring your budget throughout the year is key in ensuring that it remains accurate and up-to-date.
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How to use your nonprofit budget as a tool for financial health?
Step 1: Determine what your organization’s goals are
Set organizational goals before creating a budget in order to ensure that the budget is aligned with the organization’s goals. This will help to prioritize program delivery goals and clarify annual goals from strategic plans. Having measurable goals will also allow for progress to be tracked and necessary changes to be made.
Step 2: Understand your organization’s current financial status
Understand their current financial status in order to budget effectively. A budget should be accurate, transparent, and based on sound strategies. Nonprofits must disclose certain financial information to the public in order to gain trust and support from the public. A budget should outline projected expenses and revenue so that team members can understand where money is being spent and how it is affecting the organization’s goals. Understanding an organization’s financial status is important for transparency and image purposes. Calculating financial statements and sharing insights with staff, volunteers, and board members can improve engagement within the organization.
Step 3: Choose who will be involved in the budgeting process
Involve all stakeholders in the budgeting process, so that everyone has a say and understands the rationale for decisions. Inclusive budgeting can be challenging, but it offers great opportunities for team collaboration and alignment of goals.
By involving staff and board members in the budgeting process, organizations create a comprehensive financial plan that is aligned with their organization’s goals and mission. This ensures that budgets are set and updated regularly, with deadlines and milestones set to track progress. Furthermore, by getting input from everyone involved in the budgeting process, the budget reflects the true needs of the company.
Step 4: Follow best practices for creating a nonprofit budget
The budgeting process for a nonprofit organization is essential to the success of the organization and should be given careful consideration. When creating a budget, keep in mind your goals, fixed and necessary costs, and realistic expectations. Make sure to include all relevant information (like grants, contracts, agreements) when drafting your budget. Be realistic about what can be achieved with the available funds and be mindful of inflation when setting goals.
Approve your budget at the end of the year and make sure to account for any unexpected circumstances which may have occurred during that time period. Make allowances for inconsistencies in donor funding. Include input from your executive director or other key staff members when creating your budget. The budgeting process takes time, but it’s worth it to get it right the first time.
Step 6: Decide which grants you will apply for
It is important to be strategic when deciding which grants to apply for in order to be successful in receiving funding. Checking out past recipients of grants and researching what they are interested in and how much funding they have available is a key step in this process. Additionally, specifying how the grant money will be used in the proposal budget is also important. By taking these steps, organizations will have a better chance of success when applying for grants.
Step 7: Make cash flow your priority
Cash flow is important for financial health because it allows companies to pay their bills and invest in their future.
Step 8: Pay attention to all of your budgets
It is important for nonprofits to have a healthy financial budget in order to maintain fiscal responsibility and ensure that their operations are sustainable. A well-managed budget can help a nonprofit track its progress, assess where cuts may need to be made, and make informed decisions about future spending.
Step 9: Simplify—don’t overwhelm!
Simplifying the budget can help a nonprofit organization achieve financial health by providing a useful tool for understanding the context and developing a process. A bookkeeper can help with the complicated parts of the budget, and it’s important to monitor the budget throughout the year.
Step 10: Don’t operate on a shoestring budget
It is important for a nonprofit to have a budget that is not too tight in order to be able to afford the necessary resources and keep up with the demands of their mission. Nonprofits need to start early in the budgeting process and develop a system for how they will spend their money. They also need to clarify their context, get the right amount of detail, figure out income and expenses, make cash flow a priority, and monitor their budget throughout the year. By following these tips, nonprofits can ensure that they are operating within their means and fulfilling their goals.
Why is it important to have a realistic and achievable budget for your nonprofit organization?
A budget is an important tool for any organization, but it is especially important for nonprofit organizations. A budget can help a nonprofit track its spending, set goals, and make sure that it is using its resources in the most effective way possible.
Nonprofits have to be especially careful with their finances, as they often have less money to work with than for-profit organizations. This means that it is even more important for nonprofits to have a realistic and achievable budget.
If a nonprofit budget is not realistic, it can be difficult to stick to. This can lead to the nonprofit overspending, which can put it in financial jeopardy. A realistic budget can help a nonprofit stay on track and avoid financial difficulties.
Achieving a budget can be just as important as creating one. If a nonprofit does not meet its budget goals, it can again run into financial trouble. This is why it is important to set aspirational goals in the budget. These goals should challenge the team to raise more money than they have in the past.
Making a budget is not an easy task, but it is an essential part of effective nonprofit management. By being realistic and achievable, a budget can help a nonprofit stay on track and avoid financial difficulties.
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Bottom Line
A nonprofit budget is an important financial document that predicts annual expenses and allocates resources for a nonprofit organization. A flexible budget is important as it can change as the circumstances of the nonprofit change. The budget is meant to be a tool for decision-making in order to best use the resources available to the nonprofit. Using nonprofit accounting software can make this process easier and faster.
It is important to have a clear understanding of your nonprofit’s goals and how you will measure success when creating a budget. You should also include grants, contracts, and agreements in your budget to help with planning. It is important to set reasonable goals and not overspend on grants you might not get. Be realistic when setting financial goals for your nonprofit. Use as much detail as necessary to create a clear picture of your budgeting situation. Consider fixed and necessary costs before creating a budget. Make allowances for timing inconsistencies (for example, large donors may give at different times of the year). Include input from your executive director or other key staff members when creating your budget.
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