Nonprofit Budgeting: Understand the Basics [+ Template]
Thursday, August 27, 2020
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You’ve likely organized a budget for your household before. You’ve averaged your expenses, calculated your income, and determined how much you can save on a monthly or annual basis. Budgeting for nonprofit organizations requires a similar process.
Nonprofit budgets are the backbone of effective financial management strategies, allowing your organization to estimate your various sources of income and plan your expenses in order to create a plan for growth and advancement.
You’ve also probably noticed that even creating your personal budget can be stressful. Nonprofits have many more elements to consider, from multiple sources of income to the combination of overhead and program expenses, making the budgeting process even more overwhelming. That’s why we created this guide—as a helpful resource for nonprofits trying to learn more about budgeting and discover best practices for financial planning.
We’ll cover everything from the basics to professional tips that will help you maximize your nonprofit budget.
Table of Contents
- What is a Nonprofit Budget?
- Features of Effective Budgets
- Budget Components
- Nonprofit Budget Template
- Budget Reviews
Budgeting is a key piece of nonprofit accounting. While you probably didn’t get into the nonprofit industry to become an expert in accounting, understanding how to manage your money effectively will lead to growth, expansion, and better fulfillment of your mission. Join the other nonprofit success stories by implementing the budgeting best practices in this guide. Let's get started.
What is a Nonprofit Budget?
A nonprofit budget is a planning document used to predict expenses and allocate resources for your organization. It details both the costs that your organization will incur as well as the revenue you expect to receive over a set period of time.
Generally, when nonprofit organizations consider their budget, they immediately think of their annual budget plan that they finalize between December of the previous year and January of the current one. While this is the master financial plan that the nonprofit will follow throughout the year, it’s not the only budget that nonprofits need to be aware of.
Nonprofits looking to learn more about creating an accurate and useful budget can always ask questions of their accounting professionals. You can also get an in-depth look at these documents with online resources like Jitasa’s nonprofit budgeting course.
Types of Nonprofit Budgets
There are a variety of budget types that your nonprofit will use. Of course, you’ll create your annual budget, or operating budget, as all nonprofits should. This is the budget that breaks down your annual projected revenue and expenses for the organization. It categorizes your revenue by different funding sources and your operating expenses by program and overhead costs.
Depending on your organization’s operations and plans, it may also be helpful to create budgets focused on specific aspects of your organization to ensure everything is in order. For example, you might create the following budgets:
- Capital budget: This budget projects the expenses and revenue associated with multi-year, long-term projects. It tends to cover your nonprofit’s capital campaigns and other major expense campaigns.
- Program budget: If your organization is launching a new project or program, you may create a separate budget that covers the specific revenue you’ll need and the expenses you expect to incur while launching the program. Be sure to consider both the one-time expenses involved with launching the program as well as those that you’ll need to incorporate into your operating budget from year to year to maintain it.
- Grant proposal budget: When you apply for a grant, you may need to develop a budget describing how you will use the grant funds to advance your organization’s mission.
Throughout the year, you’ll review these budgets regularly to monitor the process of your various projects, your fundraising success, and your general financial standing. This means your budget isn’t something that you create but never look at again. Instead, it’s a living document that should be at the center of your organization’s financial activities.
Features of Effective Nonprofit Budgets
Whether your nonprofit has never had an effective budget in the past or you’re a seasoned veteran trying to perfect your budgeting capabilities, by reviewing your budgets from the last several years, you can make your financial plan more effective. Review the budgets you made during strong economic times as well as those created during the years of the pandemic and resulting economic downturn. What went well? Which opportunities could've been improved upon?
You can also look at past financial audits at your organization. If any comments or concerns were lifted about your budgeting strategy, you can implement those to create a more effective budget in the future.
Novices at budgeting or new organizations may not have access to these resources. Luckily, in this section, we’ll cover some of the features of effective nonprofit budgets, so that anyone can improve their financial planning. Let’s dive into each of those features.
Your nonprofit’s budget and your strategic plan should go hand-in-hand. Every aspect of your budget should be directly associated with a specific activity that you’re looking to accomplish in the given year.
In addition, each of these activities should have a defined separate budget. When you’ve developed a program budget for each of these activities, you’ll then use that information in your larger operational budget.
For example, your nonprofit may set a goal to raise $15,000 to build a computer lab at an inner-city school.
You’ll need to put together a budget that plans out all of the necessary expenses to build such a computer lab. For instance, you should estimate the cost it will take to buy the computers, invest in effective wifi, and gather miscellaneous equipment (like insurance) necessary for such an investment. All of these elements will be spelled out in your program or project budget, defining which of these expenses will be one-time costs or recurring expenses over the years.
Then, in your operational budget for the year, you’ll include your $15,000 computer lab program expense. You’ll also need to determine how you’ll raise that funding and what sources of revenue will help you fund the project.
Specific Time Period
When your nonprofit sets goals for your organization’s strategic or development plan, you make sure that those goals are specific, measurable, attainable, realistic, and time-based (or SMART). The measure we want to emphasize here is the time-based aspect. Your nonprofit should be very mindful of time as you craft your budget.
Nonprofits usually devise an operational budget for a single year. However, it’s important to consider when your organization expects to collect revenue to determine when you want to complete the activities outlined in the document. For example, if you know that #GivingTuesday and year-end giving are major revenue sources for your nonprofit, you may decide to complete a larger project directly after these campaigns.
Another reason time is important? Getting the budget approved and setting check-ins for your team. Before you even start the budgeting process, you should set a day and time when you want your nonprofit board to approve the document. This holds you accountable by providing a due date to complete the plan.
Finally, time is an essential component if you're devising a capital budget. While operational budgets cover the span of a year, your capital budget expands beyond that timeframe. These budgets cover growth initiatives that take several years to complete, such as capital campaigns or building plans.
Realistic and Measurable Metrics
The idea of defining realistic and measurable metrics goes along with categorizing the activities in your organization’s budget. Each of your activities should be associated with a specific dollar amount for each expense and revenue source.
This is especially important when your organization develops the revenue portion of your budget. Your nonprofit brings in different amounts from a variety of revenue sources, each of which should be specifically defined in your budget.
For example, if you’re expecting to receive $100,000 from individual fundraising this year, you may determine that $50,000 will come from major donors, $20,000 from peer-to-peer campaigns, $20,000 from your online donation page, and $10,000 from direct mail fundraising.
As you make these determinations, remember that each funding metric should be realistic for your team. Analyze your past fundraising successes to estimate your revenue for upcoming years or initiatives. However, you may also choose a more aspirational goal to push your team to raise more. Just don’t set it too high to make sure you don’t discourage your team. Find a balance between stretching your team’s fundraising abilities and setting realistic goals that you’ll be able to reach.
Nonprofit Budget Components
When crafting your personal budget, you likely focus more heavily on your expenses than on your revenue. Most individuals have only a few sources of income, which stay fairly consistent from month to month. However, because nonprofits have many types of revenue, it’s important that their budget focuses equally on both revenue and expenses.
Therefore, your nonprofit’s expected revenue and expenses are the two main components of your organization’s budget. Let’s dive a little deeper into each.
Your expected revenue should be separated and allocated by each fundraising source. Use past data from your development team to better understand and predict how much you’ll raise from each source. This should include your fundraising revenue, grant funds, in-kind donations, corporate sponsorships, and other income.
There are two methods of forecasting that you can use to predict your nonprofit's future revenue. Each of these forecasting methods creates some flexibility in the budget so that your organization is more likely to be on target throughout the year. These two methods are called the discount method and the cutoff method:
- Discount method: Using this method, your team identifies the dollar amount that you expect to receive from each fundraising source and then multiplies that dollar amount by the fundraising probability percentage. For example, if you’re applying for a $10,000 grant and have a 75% probability of receiving the grant, you’d update the forecasted revenue to $7,500.
- Cutoff method: Using this method, your team identifies the total amount of predicted fundraising revenue, then multiplies this number by your overall probability estimation. If you had a successful history in fundraising and expected an 80% chance of success in bringing in your predicted $100,000 of revenue, you would forecast $80,0000.
Whichever method you choose, know that can be dangerous to predict that you’ll have 100% success with all of your anticipated revenue. It’s better to be cautious when planning ahead so that you’re more certain that you’ll have the funding you need to achieve your goals, no matter what external circumstances occur.
A nonprofit accountant will be able to help walk your team through the decision of which forecasting method is best for your budget. Plus, they’ll be able to work with you to determine the probability rates for your forecasting.
The second component of an effective nonprofit budget is your expenses. You’ll use this section to determine and predict the costs your nonprofit will incur when funding your various projects, programs, and campaigns.
Expenses are usually broken down into fundraising, administrative, and program categories. The combination of your fundraising and administrative expenses makes up your nonprofit’s overhead. While every nonprofit’s expense budget will look slightly different, the Better Business Bureau recommends that organizations don’t spend more than 35% of their funding on their overhead expenses and spend at least 65% on their programs.
However, as we mentioned, the exact breakdown will look different for each nonprofit. It’s important to discuss your organization’s unique expenses with an accountant who has experience working with nonprofits, as they can help make sure your expenses are in check.
As we mentioned before, your expenses will fall under the following categories:
- Fundraising expenses can be categorized by campaign marketing costs, fundraising event venue or virtual software investments, and fundraising technology costs.
- Administrative expenses can be broken down into things like employee compensation, the investments you make to organize data, the rent for your office space, and the bills you pay for your organization.
- Program expenses are those that are necessary to conduct your work in the community. For instance, an organization that encourages music education for underprivileged kids might invest in classroom space, instruments, and music books for their program.
The best way to estimate what your nonprofit’s expenses will be is by examining what you’ve spent in the past and by collecting quotes for new expenses. Consider which of these recurring expenses are fixed and which ones are variable.
Fixed expenses are those that are constant from year to year, like your organization’s office rent. You can count on this to be the same price from year to year due to the contract you have with your management company. Meanwhile, variable expenses are those that change from year to year. For example, your fundraising expenses might vary depending on the campaigns you’re running.
There are many misconceptions about nonprofit expenses. People tend to think that nonprofit employees shouldn’t make great salaries and that overhead is inherently bad. However, this mindset isn’t accurate. The expense portion of your budget should ensure a healthy financial balance for your organization.
Nonprofit Budgeting Template + Example
We recommend reaching out to a trained nonprofit accountant to craft your budgets from year to year. An accountant will help lead you in the right direction when it comes to discovering opportunities to cut back on various expenses and boost fundraising revenue.
You can take a stab at creating your organization’s own budget with the right templates and resources. Jitasa has put together a free budgeting template that you can use to get started.
Download a free nonprofit budgeting template.Get it now!
After you’ve put together your budget for the year, it will have information about your various revenue streams as well as a categorized view of your expenses. This data may look something like this:
After you’ve completed your nonprofit budget for the year, you’ll need to send it to your board of directors for approval. Make sure that the person who presents your budget to the board understands the elements of the budget well enough to answer any questions that come up about it.
Review Your Nonprofit Budget
Dummies.com explains, “A good budget is crumpled, coffee stained, and much scrutinized. A good budget guides and predicts.” This means that your nonprofit should be frequently checking in on your budget to monitor your progress throughout the year. Rather than your budget becoming just another item on your to-do list, it should be a useful document that you reference often and use to make decisions.
Hold nonprofit budget check-ins regularly. Many experts recommend that you review your budget annually, quarterly, and monthly to make sure your organization is on track.
- The annual review of your nonprofit budget generally occurs when you’re writing the next year’s budget. You (and your accountant) will review the budgeted finances from the past year and determine where the budget stayed on course and where your finances strayed from the path. You’ll then use this information to inform your predicted revenue and expenses for the next fiscal year.
- When your team meets quarterly to review your budget, you should compare your budgeted revenue and expenses for that quarter and compare that information to the actual amounts. You should also review your grant budgets and determine which funds were won, used, left unused, etc. Finally, review the entirety of the budget and look for any discrepancies. It’s better to catch these early and make note of them for future budgets.
- Monthly budget reviews allow your team to meet together frequently and regularly to look over your finances for the month and determine the budgeted vs. actual expenses and revenue for individual projects. You can also review balance sheets for any discrepancies and look ahead to ensure that future budgetary items appear to be in line.
A trained accountant can help you make sure everything is in order during any of these budget reviews. Reach out to the accountants at Jitasa to ask about how their trained financial professionals can help your nonprofit review and craft the best budget to help you succeed.
The beauty of your nonprofit budget is that it allows your nonprofit to remain transparent with your team, your board members, and your supporters. Transparency in finances is key for instilling trust and confidence in everyone involved with the organization.
If you’re interested in working with a nonprofit accountant to help your organization ensure transparency and accountability in finances, conduct your research. Here are some additional resources you can explore for more guidance:
- Working With a Nonprofit Accountant: What to Expect. Working with an accountant can help your organization develop an effective budget. Read more about what an accountant can do for you in this comprehensive article.
- Outsourced Accounting for Nonprofits: Top Firms. Ready to start working with a nonprofit accounting firm to solidify your budget? Check out our favorite nonprofit accounting firms with experts who are more than happy to help.
- Nonprofit Financial Ratios: Definitions & Calculators. In addition to your budget, you can leverage financial ratios to determine your organization’s financial health. Learn more about your organization’s financial standing by using Jitasa’s free ratio calculators.
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