A nonprofit budget is a planning tool that acts as a financial reflection of the funds you expect to manage for a set period of time. The annual budget encompasses everything the organization is planning for the year and smaller budgets allow for planning for specific functions or activities, like an event or fundraising initiatives.
Although a nonprofit business model is not intended to generate a profit, money management is crucial for creating a sustainable organization that can truly create a positive impact on the causes you’ve set out to address. Your nonprofit budget plays an essential role in achieving this goal.
Without a budget, you risk wasting funds. What’s worse, you risk future funding because the lack of planning may be perceived as a lack of transparency.
Nonprofit budget planning areas to consider
The first step to create a nonprofit budget is to study where the organization stands today. Are there any debts, deficits, or commitments you need to take care of? How much money is in the bank?
Before creating a budget for the next term, you want to measure the activities and achievements of the current term. Did you meet the established objectives? Are you spending more or less than projected? It’s helpful to observe previous years’ revenue and expenses to discover trends so you’re better able to plan for them in the future. For example, if you’re consistently spending more on contractors than you budget for, how can you address this in the next term?
Next, identify new opportunities and threats like a potential partnership or the state of the market as it affects your operations. For example, an increase in rent or mortgage prices could affect your expenses.
Once you have the current numbers and financial picture, it’s time to think of the future. What are the goals and priorities you want to work for in the coming year? And how do these translate to your finances? All existing programs and potential new initiatives should be accounted for.
Here’s a breakdown of the key areas of your nonprofit budget:
The first factor you need to consider when planning your nonprofit budget is where the money is coming from. This one is tricky because, how do you know how much you can spend next year if you don’t have that money yet?
Similar to for-profit businesses, nonprofits can create projections based on past donations and fundraising results. This way, it’s easier to find emerging trends that could predict what the next year will look like.
Consider ongoing commitments like grants or recurring donors when planning your budget. But also look at the percentage of one-time donations and how these fluctuations tie into your full financial picture.
You want to separate income by source. Categories like individuals, foundations, organizations and government entities are the basics, but you’ll have to dig into your own data to determine the categories you’ll need.
Since you’re counting on funds that you don’t technically have yet, there are two ways to get the most accurate numbers possible. First, the discount method means that you discount the likelihood of getting the funds and reflect that total in your budget (so if your chances of getting a $20,000 donation are 70%, you’d add $14,000 to your budget). Second, the cut-off method is similar, except that the estimate is based on your entire predicted income and the likelihood of achieving it, so if your forecast is $1,000,000 and your likelihood is 70%, your total budget would be $700,000.
And lastly, you want to track your restricted and unrestricted funds. Meaning that if an organization donated funds to be allocated to a specific project, you won’t be able to use those funds elsewhere. Categorizing your expenses this way helps you hold your promises to donors and earn their trust.
On the flip side, you’ll have to determine your expenses. There are fixed and variable costs you’ll need to account for.
Fixed expenses are those you’ll have to cover regardless of what you’re doing. They include things like rent or a mortgage, staff salaries and benefits, utilities, and insurance. Variable expenses are tied to specific program requirements like contractors and venues. These are also known as overhead (fixed costs) and program expenses (variables).
The Better Business Bureau recommends that overhead should represent below 35% of the nonprofit’s budget and the remaining 65% should be allocated to programs. With this notion and the numbers you arrived at with the methods in the section above, you’ll be able to estimate how much you plan to pay for rent or staffing, for example, and how much you can allocate to specific initiatives.
Best practices for nonprofit budgeting
Without a budget, your nonprofit runs the risk of running out of funds or being unable to cover program expenses to keep operating. What’s more, you jeopardize relationships with donors and future donations due to a perceived lack of transparency.
Considering this, it’s easy to see that a well-thought-out budget is an essential element of success for any nonprofit. It’ll give you clear boundaries and enable your team to take confident action to make a positive impact.
If it’s time to plan your nonprofit budget and you need expert assistance, book a consultation now to learn more about how Trifecta Advising can set you up for success.