Budgeting is an essential part of any nonprofit’s strategy, but it can present a major challenge for brand-new or smaller organizations. These organizations often focus the majority of their attention on developing a solid fundraising strategy when considering financial information. This is an important part of nonprofit finances, but it’s only one piece of the puzzle.
Your budget will help you predict both your revenue from your fundraising strategy as well as your expenses throughout the year. Shifting your focus to a broader view of your nonprofit financial management will help organizations like yours develop a path for growth and make a greater impact on your community.
In this guide, we’ll cover some important details that will help small nonprofits like yours to start your budgeting process and get more results from your financial plan.
Understand the role of different budget types.
One of the challenges many small nonprofits face regarding budgeting is a lack of resources and time. Generally, the person developing your budget will be your executive director or another high-ranking executive who wears many hats at the organization. This means they don’t have much time—and possibly experience—to develop nonprofit budgets.
The first step to budgeting is to ensure these individuals make time in their schedule to develop necessary budgets and to understand what those budgets look like. It’s likely that with limited time, this individual would only focus on an annual operating budget for the nonprofit. But in reality, there are three different types of budgets small nonprofits should be thinking about and crafting on a regular basis:
- Operating: Operating budgets are annual budgets that cover all of the revenue and expenses that your organization needs to keep the nonprofit afloat. This will outline all money you plan to make throughout the year through fundraising and grants as well as the expenses you pay for fundraising solutions, programs, bills, and salaries.
- Capital: Capital budgets are designed to help nonprofits with their future planning, capital campaigns, and other growth initiatives that often span multiple years.
- Project: If you’re launching a new program or campaign, you might also create a budget for that specific project to help you get started. This helps keep you organized as you plan and create something new.
When your nonprofit creates accurate and detailed plans, your organization will stay better organized and more able to plan its finances. Your team members can also prepare more effectively and won’t feel like they’re constantly working on a shoestring budget.
Design a budgeting process for your nonprofit.
Just as important as designing your nonprofit’s budget for the first time is designing an overarching budgeting process. Outline the details of this process so it can be repeated year after year. This takes some of the stress and guesswork out of budgeting and planning for your nonprofit as you simply follow the steps outlined in your process.
In this budgeting process plan, you should include information such as:
- Who is responsible for pulling financial information and crafting the budget
- When the budgeting process should begin and the steps to get started
- When the budget should be completed and ready to present
- Who will present the completed budget to the board of directors
- What to do if the board members approve or don’t approve the budget
Usually, the budgeting process for a new year starts at the end of the previous year. This means your organization will be pulling together financial information and preparing for the next year in the midst of one of the busiest fundraising times. By outlining a well-constructed process for budgeting, you’ll use less time trying to scramble to put together a budget, a necessary step at this hectic time of year.
Another necessary step to effective budgeting is ensuring you have a set process for organizing and allocating your funds throughout the year. This will ensure your organization is working with accurate numbers when you sit down to create the budget. For example, let’s say your nonprofit receives a donation of an endowment. That money will need to be set aside as restricted funds and not factored into the next year’s revenue. Misallocating in this situation can result in an inaccurate budget or misappropriated funds.
Work with real numbers when possible.
In order to make your budget as impactful and accurate as possible, you should work with real numbers whenever possible. Real numbers allow you to make accurate projections and calculations to guide your nonprofit’s financial planning.
When you first develop your budget, it may be challenging to work with real numbers. You might need to make a few assumptions as you likely won’t have much information from past years to reference. However, you can still make good estimates during these early years! Use any past fundraising information you do have and quotes for expenses to craft your plan for the future. Over time, you’ll have more information about your finances and more real numbers to work with, so your budget will become even more accurate.
To predict your nonprofit’s revenue for the coming year, accountants recommend using real numbers, then calculating conservatively with two different calculations:
- Discount method. Using this method, your nonprofit would identify each source of income, predict the amount of money you expect from it, and multiply that dollar amount by the probability percentage. You’d calculate this for each source of revenue, from grants to online donations. For example, if you expect that there’s an 80% chance you’ll receive a $2,000 grant and a 70% chance your fundraising event will raise $5,000, you would multiply each expected amount with the probability percentage. Your resulting numbers for your budget are $1,600 for the grant and $3,500 for the event.
- Cutoff method. The cutoff method requires a similar calculation, except that you’ll use your total revenue amount rather than each funding source as the base calculation. For example, if you expect to raise $100,000 total and there’s an 80% chance you’ll hit that amount, you would use $80,000 as your budgeted revenue.
This conservative budgeting technique helps you build reserve funds, which can be used in the case of an emergency. Check your nonprofit operating reserve ratio as you develop your budget, using this calculation:
Operating Reserves Ratio = Operating Reserves / Annual Expense Budget
According to Jitasa’s financial ratio resource, the recommended operating reserve ratio for nonprofits is 25%, which covers three months of your expenses. You can also use the calculators on this Jitasa page to easily calculate your own operating reserves ratio and other key financial ratios!
Reference and review your budget frequently.
What good is it to set a budget for your nonprofit if you never look at it again after it’s been approved? Your budget shouldn’t just be a checkbox for your nonprofit, but instead a valuable resource that you review on a regular basis.
Designate specific times for your team to review your budget with the entire team to make sure you’re on the right track. Review sources of income and business payment history for discrepencies. You shouldn’t need to change the budget itself, but you should make sure your organization is on track with your financial plan.
Try holding your budget review sessions:
- Monthly. This provides a frequent opportunity for your team to get together and review your finances, ensuring you’re on track to meet your goals.
- Quarterly. This should be a slightly longer meeting, allowing your team to compare budgeted revenue and expenses with actual ones. You should also use this opportunity to look for discrepancies in your finances, making note of them and tracking down why they occurred.
- Annually. Your annual budget review typically takes place as your nonprofit is preparing to write your next budget. Review your budget from the previous year and determine how well you stuck to it. Be sure to address any of the discrepancies you uncovered to create a more accurate budget for the next year.
If you find discrepancies or challenges with your budget during these review sessions, be sure to document and address them at the time. Look for the root cause of these discrepancies so you can address them on a larger scale. This will help your organization maintain your data hygiene, which, according to NPOInfo, is necessary to use that information in the future.
For example, let’s say your nonprofit figured you would raise $40,000 through online donations. During your first quarterly review, you realize that you’ve only raised $9,000. If you planned to raise $10,000 each quarter, this may not look very good. However, you may have forgotten that you usually raise $5,000 more in December than in any other month. Once you’ve found this discrepancy, you can record it, and you should still be on track by the end of the year.
Especially if your nonprofit is just getting started, budgeting is essential to an effective financial plan. Operate conservatively, building up your reserve fund when possible. This will not only protect you from potential economic challenges but saving more than the minimum three months of operating expenses will also provide you with the funding you’ll need for future growth.