Running a nonprofit can be stressful, especially when you are just starting out. And learning how to create a budget for a nonprofit organization can be one of the hardest challenges you face.
But there’s no need to worry—in this article, we’ll go over what a nonprofit budget is, why budgeting is so important, and some recommended best practices that will help your organization succeed.
After reading this article, you’ll have the tools you need to get started on creating an effective and successful budget for your nonprofit.
Let’s get started.
What Is a Nonprofit Budget?
In its simplest terms, a nonprofit budget is a financial document and management tool that details how your organization will make and spend its money.
By tracking and comparing your revenue (the money you earn) with your expenses (the money you spend), a well-made budget helps you plan for how you’ll achieve your goals.
There is a common misconception that nonprofits must operate solely on a break-even basis or that they need to have extremely tight budgets. However, while it’s true that nonprofits are driven by specific missions, they still need to make enough money to be successful in advancing that mission effectively.
And since nonprofits often operate with unsteady or unpredictable income, strategic budgeting can help them prepare for unforeseen circumstances.
In general, a nonprofit’s revenue comes from things like:
While a nonprofit organization might have one overarching operational budget guiding all of its financial decisions, it’s also common to have different budgets for specific initiatives and events.
For example, if your organization was going to hold a fundraising event, creating a budget specific to that event could help you better plan for it and better allocate your resources.
Similarly, many grant applications also require detailed grant budgets that outline how you plan to use the grant money requested so that they can be sure the money awarded will be well-spent.
For some examples of successful nonprofit grant proposal budgets, check out this post on our blog.
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As you may have guessed from the section above, budgeting is incredibly important for nonprofits.
As a forecasting tool that helps you plan your expenses around your income, a thorough budget will not only help you achieve your goals, but it will also help you prepare for potential difficulties and obstacles.
Furthermore, a well-thought out budget can help you discover which programs, initiatives, and campaigns should be prioritized.
For example, say you work at a nonprofit that seeks to maintain and improve community parks. After creating your budget for the year, you discover that you only have the resources for one major fundraising campaign—but you were originally planning to have a 5K marathon in the spring, a dog agility competition in the summer, and a fun fall fair in the fall.
Creating a budget beforehand can help narrow in on which things to prioritize and which things to hold off on for the time being.
A budget is also important for transparency reasons.
Most donors like to know that their dollars are being spent effectively and with thoughtful purpose. Having a detailed budget can help you earn and maintain the trust of your donors because it shows them that your organization is taking its finances seriously.
Laying out your expenses and expected income in advance ultimately helps you make decisions about how to use your organization’s money more strategically and more effectively to advance your mission.
If you are looking to start a nonprofit but all of this talk about finances has you intimidated, don’t be discouraged! Check out this post on our blog about starting a nonprofit with no money.
Now that we’ve explained what a nonprofit budget is and why it is so important, it is time to go over the steps for creating a budget for your own organization.
Choose Who Will Be Involved
The first step in creating a nonprofit budget is deciding who will be involved in the process.
For example, will the Treasurer of the nonprofit be heavily involved or will they just get a final say when you present the budget to your Board of Directors?
If you have multiple departments, are you going to recruit a representative from each, or will you just be asking them to forward you some numbers? Will you be hiring a consultant to help you the first time, or will you be doing this by yourself?
Picking the right people for your budgeting team is the best way to ensure this process goes as smoothly as possible. While your nonprofit may not have all of these positions, typically, you can expect the following people to be involved in the drafting of a nonprofit budget:
Treasurer
Executive of Finances
Financial Management Team
Heads of Departments
Senior Staff
Consultants
If you have anyone in your nonprofit that has experience with this process—or perhaps with creating a budget for a for-profit company—then it is highly recommended that you include them on your team.
Identify Goals
In order to create a budget, you need to identify your goals. After all, you need to know what you are budgeting for in order to develop your budget.
Ask yourself:
What do we plan to accomplish this year?
How do we plan to accomplish that?
What are some stretch goals we can work toward?
What are some possible hurdles we will face?
What will we do if there’s a surplus?
What about a deficit?
Are any of our projects time sensitive?
If there are multiple departments working on the budget, make sure each of them specifies exactly what they’ll need in order to be successful in the upcoming year. Your business plan may also come in handy during this part of the process.
Create a Calendar
Look at the year you have ahead and plan out your internal deadlines and responsibilities accordingly.
Work backwards from the day you are expected to present the budget to the Board of Directors. This should tell you when you need to gather all of your data, when you need to have your projections planned, and when you need to put it all together in a comprehensive and presentable format.
If there will be multiple people working on the budget with you, or if you are working with multiple departments in your nonprofit, you must inform them of when you’ll need their materials.
It is important to keep everyone informed of what others are doing. After all, when it comes to nonprofit budgeting, every aspect of your organization becomes interlaced, and the work one person is doing affects three others, and vice versa.
As this process can take up to 6 months to get done correctly, it is important to always have everyone on the same page in order to minimize miscommunication.
Choose a Model
When calculating a budget, most people choose one of two models.
The first approach involves calculating all of the expenses you are expecting for the year.
Once you know how much you’ll need to spend, you can then create fundraising projects and campaigns aimed at reaching and exceeding that amount. This model would be recommended for nonprofits that have a specific project planned out and need to know how much money they’ll have to spend in order to get the project done.
The second approach is just the opposite of the first.
Rather than calculating your expenses first and creating a fundraising strategy around it, you calculate how much money you expect to raise that year and plan your expenses so that they don’t exceed that amount. This model would be best suited for a nonprofit that may be experiencing or expecting growth for the year.
Both models have their pros and cons, and what is best suited for one nonprofit might not be the right choice for another. There are also many budget templates available online to help you get started, so you don’t need to do everything from scratch.
Identity Income and Expenses
Now it is finally time to identify all of your income and expenses.
Regardless of whether you calculate your income first or you do it the other way around, you’ll need to list every source of projected revenue and every item you plan to spend money on.
Gather all the data available to you that will help you identify all of your income and expenses such as:
Financial reports from previous years
Estimated operating costs
Funder data
Past operating results
The prices of programs you wish to run
Fees for possible contractors
The only way for your budget to accurately reflect your nonprofit’s financial situation is to have accurate and up-to-date data.
Present Your Budget to Your Board of Directors
The final step in creating a budget is getting your board’s approval.
Nonprofits are run by an unpaid board of directors that is legally required to oversee all of the organization’s activities to ensure they are in compliance with their mission and the law.
For this reason, they get the final say on your budget by giving their approval.
It is not uncommon for nonprofits to go through multiple budget drafts until they finally arrive at something the board believes to be in the best interest of the nonprofit. So don’t be discouraged if you don’t get it right on your first try.
Now that we have the steps for creating a nonprofit budget, it is time to discuss some best practices and tips to keep in mind.
Start Early
One of the most important things to remember when budgeting is to start early.
This is a time sensitive process that cannot be rushed—therefore, starting as early as possible will guarantee you have the proper time needed to thoroughly develop your budget while remaining on schedule.
Double Check Your Numbers
Throughout the budgeting process, keep double-checking your numbers.
Double-check the numbers given to you by your teammates and make sure they are double-checking the figures you provide for them. This will decrease the chance of an error making it through the later stages of the process and throwing off your budget and wasting hours of work.
Account for Inflation
Inflation is one of those exterior factors that is outside of your control.
However, you can still plan around it by keeping up with financial news. Look at your previous budgets to try to get an idea of what to expect. It is typically recommended to account for 3% inflation every year.
Account for Income Inconsistencies
As we mentioned a few times in this article already, one of the biggest differences that sets a nonprofit budget apart from a for-profit one is the inconsistent income.
It may be tempting to ignore this fact as it is easier to calculate a budget when you have a steady stream of revenue, but you should account for income inconsistency throughout every step of the process. Remember that a nonprofit budget should be flexible—you should be ready for cases where you receive less money than expected or where you receive more.
Staying flexible will help you avoid ending up in the red.
Search for Potential Grants
Don’t forget one of the biggest potential sources of income—grants!
Capacity building grants, for example, may help you expand your operations, while project specific grants will help you fund initiatives so that you can use the money you raise through donations to cover other expenses.
If you need help finding grants that are specific to your nonprofit’s mission and needs, consider checking out Instrumentl to boost your fundraising strategy.
Wrapping Up: The Next Steps
Creating a budget for a nonprofit organization can seem overwhelming at first. It can be a long and daunting process that requires a lot of attention to detail.
But once you grow comfortable with it, it becomes much easier. Hopefully this article has equipped you with the knowledge you need to create a well-balanced budget that will help your nonprofit thrive.
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