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Without a budget, running a nonprofit is like driving blindfolded – you might struggle to manage funds and meet goals, ultimately impacting your mission. A nonprofit operating budget helps you plan ahead and use your resources to serve your community. This financial roadmap is just one crucial aspect of running a nonprofit successfully.
This article breaks down: what a nonprofit budget is, which nonprofit budget format to use, and why nonprofit budgeting is important. You'll also find useful tips and a free nonprofit budget template to kick-start your budgeting process.
A nonprofit budget is a financial roadmap that outlines how an organization plans to use its funds. It details expected income and breaks down operating expenses and overall costs.
This document covers a 12-month period and serves as a planning tool and management aid. It helps nonprofits track their financial performance against their goals throughout the year.
The annual budget focuses on the nonprofit’s planned financial activities, expected revenue sources, and expenditures for the fiscal year ahead. While the annual budget is the primary financial plan, organizations often use other types of budgets to manage different aspects of their finances.
Types of nonprofit budgets
Operating budget
This budget provides a breakdown of your annual projected revenue and expenses. The nonprofit operating budget categorizes revenue by different funding sources. It also divides operating expenses by program and other overhead costs.
Program budget
It offers an overview of the revenue and expenses associated with specific programs. It also includes the ongoing expenses required to sustain the program, which should be incorporated into your operating budget.
Capital budget
It projects expenses associated with long-term projects or multi-year campaigns. This budget covers your organization’s capital campaigns and other major expense campaigns.
Grant proposal budget
It defines how you would use grant funding to support your mission. Most organizations that provide grants request that nonprofits submit their grant budgets.
5 key elements of an effective nonprofit budget
1. Alignment with your nonprofit’s mission
Your budget should align with your nonprofit's mission and goals to ensure your revenue and spending are consistent with your core purpose. This alignment helps avoid wasting money on activities that won't advance your mission.
Identify the key areas that support your organization's objectives, such as program delivery, fundraising, staff development, or community outreach. Evaluate the importance of each area and the potential impact on your mission. Divide resources and funds accordingly, prioritizing activities that directly contribute to your goals.
Regularly review and adjust your budget to maintain this alignment. As your nonprofit grows and evolves, be prepared to shift resources to more critical areas of your mission.
2. Revenue projections
Revenue projections are all about estimating the money your nonprofit will bring in. Break down your expected income by source - donations, grants, sponsorships, membership fees, and ticket sales from fundraising events.
To make accurate predictions, look at your past performance. How much did each source bring in last year? This data can help you make educated guesses about future income.
Remember, every nonprofit is unique, and your main sources of income might differ from others. The key is identifying your revenue streams and making realistic estimates for each. This helps you plan better and avoid financial surprises down the road.
3. Expected expenses
Expenses are the costs your nonprofit incurs to run projects, operations, and campaigns. They typically fall into three categories: fundraising, administrative, and program costs. The first two make up your organization's overhead.
When budgeting, break down expected expenses for each category. Always allocate a portion of your budget to contingency funds, which can be a lifesaver when unexpected costs or emergencies arise.
4. Scenario planning
Incorporate flexibility into your budget by preparing for various financial scenarios. Develop multiple budget versions: optimistic, realistic, and conservative. This approach helps your nonprofit adapt to changing circumstances, whether facing unexpected challenges or seizing new opportunities.
Consider potential changes in your funding sources, program demands, or economic conditions. For each scenario, you should outline specific action plans to maintain financial stability. This proactive strategy enables quick, informed decisions when faced with financial fluctuations, ensuring your nonprofit remains resilient and mission-focused throughout the year.
5. Alignment with your nonprofit strategic plan
A nonprofit strategic plan outlines your organization's goals and activities for the year, while the budget ensures you have the resources to achieve them. Each budget item should connect to a specific planned activity or goal. This alignment helps ensure your spending directly supports your mission and strategic objectives.
Importance of budgeting for nonprofits
Creating a thoughtful budget is crucial for nonprofit success. It's not just about tracking numbers; it's a roadmap that guides your organization toward its goals. A well-planned budget helps you:
Acknowledge your goals
An effective nonprofit budget prioritizes important things that push your goals forward. The more resources and funds you dedicate to them, the more likely you will reach your objectives.
Manage your expenses
A budget allows you to work for your mission without the risk of outpacing your funds. It lets you track expenses closely, preventing overspending and identifying cost-saving opportunities.
Remain accountable
A good nonprofit budget provides a framework for financial accountability. It demonstrates the organization’s financial health and responsible use of funds, which is essential for maintaining the trust of the board, donors, and other stakeholders.
Manage risks
Budgeting allows you to identify potential risks and develop effective contingency plans to manage unexpected expenses or revenue shortfalls.
A good budget isn't just about numbers - it's your nonprofit's financial safety net that keeps you on track, no matter what challenges come your way.
Evaluate your performance
A well-crafted budget offers a benchmark for evaluating your organization's financial performance over a specific period. By comparing actual progress against your budget, you can assess your programs, optimize operations, and make better decisions.
Before you develop your new budget, examine your nonprofit's past budgets, financial reports, and donor base to gain a clear understanding of its financial situation.
Further assess your cash flow, current assets, and liabilities. Test the current market situation and how it's likely to influence your income.
Work with this realistic baseline upon which you can create an accurate budget for your nonprofit organization.
Step 2: Define timelines, goals, and priorities
When creating your nonprofit budget, clearly define your organization's goals and priorities for the upcoming period.
What do you want to achieve? Which programs or initiatives are most important? Set specific timelines for these objectives.
This step ensures your budget aligns with your overall strategy. By linking financial decisions to your mission and goals, you'll make smarter choices about where to allocate resources.
Remember, your budget should support your nonprofit's vision, not just track expenses.
Step 3: Involve the right people
Creating the budget is not the responsibility of the finance team only. Since it impacts every department of your nonprofit, consider all stakeholders while creating the budget.
Get the input of your volunteer head, executive director, fundraising leader, and other department heads into the budgeting creation.
Involving a team in your budgeting efforts helps share the responsibility and leads to increased accountability.
Step 4: Define your nonprofit’s revenue stream
It's time to forecast your nonprofit's income for the upcoming period. List all the ways money will come in - donations, grants, events, corporate sponsorships, and more.
Here's a smart trick: Grade each income source from A to D based on its reliability. 'A' is rock-solid, while 'D' is more of a maybe.
Then, do some quick math. If you're hoping for a $10,000 grant, that's 80% likely to come through, budget for $8,000 (10,000 x 80%).
This approach gives you a realistic picture of your expected income, helping you plan more accurately.
Step 5: Identify all your expenses
After projecting your income, it's time to map out your expenses. Break these down into three main buckets:
Program expenses: Costs directly tied to your services
Administrative expenses: Overhead not linked to service delivery
Fundraising expenses: Costs of raising money
Within each category, list specific costs such as rent, staff salaries, supplies, and transportation. Decide how much to allocate to each area, always keeping your nonprofit's goals in mind.
Step 6: Figure out your cash flow projection
Cash flow projection refers to the monthly movement of funds coming in and going out of your nonprofit organization. Tracking this number tells you how much you have with you at any given point.
This is crucial for budgeting because it helps you anticipate tight spots and plan accordingly. It's especially important for nonprofits that may have irregular income streams or seasonal fluctuations in donations.
Step 7: Draft your budget
Start by listing all income sources and expected amounts. Then, detail your expenses across program, administrative, and fundraising categories. Aim for a balanced budget where income meets or exceeds expenses.
Remember, this is a draft. You'll likely need to revise and adjust as you go. Be realistic, but also allow some flexibility for unexpected changes. Consider creating multiple scenarios - optimistic, realistic, and conservative - to prepare for different financial situations.
Step 8: Seek approval from the board of directors
Once your nonprofit budget is created, it must be reviewed and approved by the organization’s board of directors.
The responsibilites of a nonprofit board include a fiduciary duty to oversee and approve the budget. Once they give you a heads-up on your financial plan, you can implement it.
Step 9: Track and assess regularly
Remember that your budget is a living document that requires regular review and adjustments. Regularly compare actual expenditures against the prepared budget to ensure your nonprofit is on track.
You might notice a fundraiser underperformed or a new opportunity needs more funding. These insights allow you to adjust quickly, seize opportunities, and manage your finances more effectively. By staying on top of these variances, you can make informed decisions to keep your nonprofit financially healthy and mission-focused.
5 best practices for nonprofit budgeting
1. Use a pre-built nonprofit budget template
A template saves time by providing a structured format where you input data. These usually include a comprehensive set of income and expense categories.
You can also check out customizable templates to fit the unique needs of your nonprofit. Many nonprofit budget templates also come with built-in formulas and functions to automatically calculate percentages, variances, and totals.
You can easily find pre-built templates for operating budgets, program-based budgets, and grant proposals.
2. Create separate budgets
If you’re hosting several fundraising events or focusing on a large campaign, create a separate budget for these ventures. Keep your main organizational or operational budget focused on your operations.
Separating your operating budget from your capital budget allows for better planning and resource allocation, ensuring that big projects don't overshadow regular operations. It also helps you track progress on specific initiatives and make more informed decisions about future investments.
3. Account for inflation
During economic downturns, individuals and companies can reduce their charitable contributions. While planning the budget, you must also consider inflation to divide your funds and manage expenses in a way that your operations stay afloat despite less funding.
Take a look at your last year’s budgets to gain insights into what to expect. It is generally suggested that you account for 3% inflation every year.
4. Consider income inconsistencies
Nonprofits rely on a combination of funding sources such as donations, grants, fundraising events, and more. These income streams are unpredictable and fluctuate throughout the year.
Note the months and the sources that bring in more revenue and those that offer less funding. By considering these inconsistencies in financial planning, a nonprofit can ensure that it has enough reserves to cover periods of low income. This helps cut cash flow problems and ensure continuity of operations.
5. Rely on nonprofit accounting software
With nonprofit budgeting or accounting software solutions, you can streamline the financial planning for your nonprofit.
These platforms come with the ability to report, analyze, and collaborate on budgeting. They support complex calculations, web and Excel integration, donation tracking, and invoicing.
With a centralized platform for creating and managing budgeting, every organization member has clear and direct access to your spending plan. It leads to more effective financial management and decision-making processes.
Our template offers a comprehensive financial overview, covering both revenue and expenses in detail. It allows you to track various income sources, categorize expenses, and compare current figures with previous years.
Whether you're new to budgeting or looking to refine your process, this template offers a solid foundation to build upon.
A well-planned budget is the backbone of a successful nonprofit, guiding your financial decisions and helping you achieve your mission. Throughout this article, we've explored the importance of budgeting, different types of nonprofit budgets, and a step-by-step process to create one.
Simplify your nonprofit budgeting process with Zeffy, the only 100% free fundraising platform. By choosing Zeffy, you can save more on your nonprofit's expenses and keep 100% of your donations, with no hidden charges.
A nonprofit budget depends on the organization's size and mission. According to the Nonprofit Impact Matter report 97% have budgets of less than $5 million per year. While 92% operate with less than $1 million a year and 88% spend less than $500000 yearly.
Salaries make a significant part of a nonprofit's program expenses as no organization can run without staff. The Better Business Bureau's Charity Accountability Standards mention that nonprofits should spend around 65% of their operating budget on program expenses. They should divide about 75% to 90% of this budget into paying employees.
In a zero-budget approach, nonprofits plan their budgets as if they were brand new or from scratch. They start planning with no history to add to the process and the budget is based on future projections rather than historical data.
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