Ahh yes… the annual budget. It's an exhausting exercise of crunching numbers until the coffee runs dry and you arrive at an agreement of how much money you'll need to raise and spend this year so your nonprofit can accomplish its goals.
Healthy, effective nonprofits live by annual budgets so they can get the most out of limited resources. But the budget-creation process doesn't NEED to be long and dreadful! We've gathered some tips, tricks, and best practices from industry experts to help ease the pain and equip you to create an effective budget for your nonprofit.
Table of Contents
Nonprofit Budgeting Basics
A Quick Guide to Creating a Nonprofit Budget in 8 (Relatively) Easy Steps
- Set your calendar
- Set your goals
- Draft the budget
- Create an annual total, and don't forget about inflation
- Have a contingency plan
- Does your budget reflect your values?
- Present your budget to your board of directors
- Create a schedule to review and update your nonprofit budget
Nonprofit Budgeting Basics
A budget is the foundation of sound financial management and a key component of financial stability for nonprofits of any shape and size. Really, it's the most effective way to assess and predict just how much it will cost to run your organization and prepare for upcoming expenses.
The responsibility of creating an annual budget usually falls first to the staff or organization leaders. Usually, board members then review and approve the proposed budget. The approved budget serves as the financial guide for the year's fundraising and spending plans.
A nonprofit's budget is meant to serve as a guide to help your organization plan for current and future needs and assess your current financial health. It's not meant to be the rule of law!
Two kinds of budgets each year
Don't panic, but your nonprofit really needs two budgets--an operating budget and a capital budget.
Operating budget: This budget helps your nonprofit break down its predicted expenses and revenues. Most nonprofits list all the revenue by different sources and itemize all the program's operating expenses and overhead costs.
Capital budget: A capital budget predicts the income and expenses of long-term projects. It should reflect your overall financial position and include assets with long-term benefits, not just a one-year glance. Many people think of capital budgets as something for construction projects or other large, costly endeavors that usually take more than one fiscal year to pay off.
The best practice is to regularly review these budgets throughout the year to monitor the progress of the various fundraising efforts and projects and keep tabs on your financial standing. Like we said before, your budget isn't set in stone. It's a living document that should be at the center of all your financial conversations and activities.
Features of a good budget for nonprofit charities
Even though every nonprofit is different and has unique needs and demands, every good nonprofit budget has many of the same features and components.
A defined time period: A SMART goal is time-based, and your budget should be, too. Most nonprofits create budgets for each year. It doesn't really matter whether you follow the calendar year, fiscal year, or some other period. What's most important is to create a plan for when your organization plans to accomplish activities and collect revenue.
Measurable and attainable metrics: Look at your previous funding and budget to choose realistic goals for your team, especially as you set the revenue part of your budget. For example, suppose you raised $50,000 last year from major donors and $100,000 from monthly donors. In that case, you might set a goal of increasing each category by 10%.
It's great to set aspirational goals and metrics. Still, each goal needs to be specific, measurable, and not so aspirational that you discourage your team.
A budget template: When it's time to start putting together your budgets, it's best to use similar budget templates from year to year and throughout your organization. This helps keep everything consistent. There are many budget templates online. Your financial advisors can offer the best insight into what template will best fit your organization's needs.
A budget for each strategic activity: Your strategic plan and your budget should work together. Every part of your budget should correlate with an activity in your strategic plan. Additionally, every activity in your strategic plan should have its own budget. All these small budgets should combine into your organization-wide operating budget.
Keep a $0 bottom line: Once you estimate your total revenue, compare that to your total expenses. If the income doesn't cover the costs, you'll need to either raise more money or cut something from your programs until you get to $0. It's tempting to overestimate the revenue to get to a $0 bottom line, but it's more valuable to be realistic.
A Quick Guide to Creating a Nonprofit Budget in 8 (Relatively) Easy Steps
Don't worry… it all sounds overwhelming, but we've boiled it all down into these simple steps to help you create an excellent budget for your nonprofit.
1) Set your calendar
Start with the date your board of directors will approve the final budget and work backward from there. Set internal deadlines for when you'll have the budget and strategic activity drafts complete. The larger your nonprofit is, the longer this process will probably take. Some nonprofits plan for a 5 to 6-month process.
2) Set your goals
Since your budget and your program plan are so interconnected, it's best to treat them that way. Work as a team to create both your financial and program goals to ensure all your goals are aligned and achievable.
3) Draft the budget
We already mentioned earlier that it's good practice to use a budget template for consistency and ease. Start with a basic template that outlines your primary revenue sources and basic line-items like salaries, benefits, office expenses, travel, etc. However, avoid having too many line items as this can make your budget unnecessarily complicated, lengthy, and rigid.
Now that you've got your template, organizational goals, and financial data, it's time to start building your budgets. Remember, each program or department should get its own sub-budget. Make sure you're accurately projecting monthly cash-flow to ensure you've got enough resources on hand throughout the year for all your activities, projects, and expenses.
Many industry experts recommend budgeting by the month rather than an overall annual budget. This makes it easier for your organization to accurately track your progress and identify any areas you may need to realign as early as possible.
4) Create an annual total, and don't forget about inflation
Even though you're creating monthly budgets, you still need an overall annual column to be able to budget on a year-to-date basis. And don't forget about inflation, which is about 3%. If you're creating a multi-year budget, be sure to account for inflation on each line-item for each year.
5) Have a contingency plan
In the military, they say, "no plan survives initial contact with the enemy." Even the best-laid budget plans face unforeseen circumstances (COVID-19 anyone?). It's wise to create a contingency plan to identify and prepare for potential bumps in the road.
Your contingency plan should also include basic ideas of how you'll communicate with your donors and stakeholders about any necessary changes.
Of course, you can't plan for everything that could possibly go wrong. (I don't think very many of us predicted a global pandemic in 2020.) Still, having some general contingency plans will help you react in meaningful ways if things begin to "go pear-shaped."
6) Does your budget reflect your values?
Now that you've got a solid draft of your annual budget, does it reflect your nonprofit's goals and values? Does it support both your short and long-term strategic goals and plans?
An often-overlooked question to consider is whether the compensation plans you have for your employees reflect your commitments to equity. Your board of directors can help ask these bigger-picture values questions.
7) Present your budget to your board of directors
Though you may have been working closely with your board of directors throughout this process, now's the time to present the full budget proposal to your board. Be as transparent as possible and leave plenty of time for questions, concerns, and change requests from your board members.
8) Create a schedule to review and update your nonprofit budget
Remember, your budget is a living document that may need to change as the year goes on! I'm not sure any 2020 budget survived the entire year intact. Most budgets need at least a few minor adjustments, even in entirely predictable years. Create a schedule to review your budget and compare it to your actual fundraising and cash flow throughout the year.
It's quite common for banks, grant-makers, and even donors to request to see your budget before any major financial transactions. If and when you share your budget, be sure to stress that your nonprofit reviews the budget throughout the year and makes revisions as needed.
Now that your nonprofit's budget is ship-shape, here are three more resources to help you get organized this year.
- Building Your Nonprofit Development Department: This blog post offers an excellent overview of what an effective development department can do. It also has five great tips to help you assess your current fundraising needs and determine the most effective ways to build your development department so you can accomplish your fundraising goals.
- Write a Fundraising Plan That converts More Donors: A fundraising plan will set your nonprofit up for long-term financial stability. It's not enough to just plan to ask as many people as possible to donate. You need a plan that integrates a wide range of fundraising strategies. This blog post will help you develop an effective fundraising plan in six (relatively) easy steps.
- Everything Your Nonprofit Should Know About Donation Receipts: Nobody likes paperwork, but sometimes it's a necessary evil. Donor receipts aren't just required for the IRS; they're actually an opportunity for donor care! Head over to this blog to learn about the best practices around donation receipts and how you can create an effective system for your nonprofit to stay on top of this part of fundraising.
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