If you handle money at all (personal life, business, etc.), you need a budget.
If you’re leading a nonprofit, you definitely need a budget!
A lot of people cringe at the thought of budgeting. They immediately feel like they’re back in math class having to turn in a project that was due yesterday. The numbers are overwhelming and they don’t know where to start.
We get it. We’ve been there. Budgeting can be intimidating, but it doesn’t have to be that way.
This post will give you a step-by-step guide to creating a solid nonprofit budget. One that will set you free to focus on doing even more good in the community you serve!
The Importance of Budgeting
Budgeting is a big deal because, as national financial expert Dave Ramsey says, “if you don’t tell your money where to go, you’re going to wonder where it went.”
A budget is simply a strategic plan to give every dollar that comes into your organization a job to do. And, if you’re like most nonprofits, every dollar has to work really hard. You can’t afford to waste any.
Ramsey Solutions personality Rachel Cruze (also a daughter of Dave Ramsey…so she knows a thing or two since she grew up around it) wrote an article that gives “6 Reasons Why Budgeting Is Right For You.” They’re written with personal finance in mind, but the principles easily apply to the need for good nonprofit budgeting.
Check out their article for full details, but here’s a quick summary of a few of the main points with some of our thoughts as well:
- Your budget is a plan for your money. You’ve probably heard that “failing to plan is planning to fail.” It’s true in life and money. A budget helps you map out how you intend to spend the money that is coming into your nonprofit. It keeps you from overspending in one area and getting caught empty-handed in another.
- A budget lets you stay in control. Instead of the constant flow of urgent needs determining how you spend your organization’s funds, a budget allows you to proactively and strategically control where money is used so that you can maximize your donor’s return on their investment in your cause.
- A budget allows you to spend without regret. How many times have you spent money on something for your charity/nonprofit and immediately thought “I hope we didn’t just make a mistake?” When you create specific categories for your expenses and allocate funds to them, you are then free to spend away (as long as there is money available in that category) without being afraid that you’re affecting another area of your organization.
- A budget creates accountability. As a nonprofit leader, you are responsible for how you spend the money entrusted to you by your donors and supporters. Because you have a board of directors, you also have to be able to account for each and every dollar. Creating and sticking to a detailed nonprofit budget allows you to stay accountable all along the way.
Creating An Annual Operating Budget
Now that we’ve established the why behind creating a nonprofit budget, let’s look at how you do it.
Everything you’ve read so far you probably intuitively understand and agree with. Doing a budget is where most people get tripped up. That’s the “meat and potatoes” part of the process, and probably why you clicked on this post to begin with.
Creating an annual operating budget is a fairly simple process, as you’ll see in a minute. It is made up of three basic categories:
- Revenue – money your nonprofit receives from any source (donations, sold items, investments, etc.)
- Fixed Expenses – costs that do not change (much) throughout the year (salaries, utilities, rent, insurance, etc.)
- Variable Expenses – costs that change based on the market around you (supplies, raw materials, fuel, hourly wages, shipping, etc.)
Every dollar that passes through your hands will fall into one of these categories. Now, let’s look at the step-by-step process to creating a nonprofit budget that works for you and helps you meet your financial goals.
The Budgeting Process
The first step in the budgeting process, especially for nonprofit leaders, is to meet with your key stakeholders to ensure everyone is on the same page. Your executive employees and board members need to be involved to contribute their ideas.
In many cases, you and your team may prepare the annual budget and then present it to select board members for their input and review. Then it will go to the full board for a vote of approval. Having a multi-layered budget approval process like this helps ensure financial integrity and accountability.
- Budgetary Planning
- Gather data. – Look back at future years to get a realistic view of how your organization spends money. Even though you will probably tweak future budgets several times,
- Talk to your team. – If you have employees, get their input on how they think the upcoming year will go. What will be your top priorities? What areas need more funding? What areas is funding no longer needed?
- Be conservative. – As you begin to put numbers on paper, it is wise to overestimate expenses and underestimate revenue. That way you won’t be caught off-guard if your planning assumptions aren’t exact.
- Establish a timeline. – In your planning sessions, set dates for when you want the budget to be completed and approved as well as benchmarks along the way. Having measurable goals that break the process into smaller chunks will make things much easier.
Once you have done these things, you’re ready to start creating a budget. You can use a spreadsheet, software designed for nonprofits such as Springly (a full-service nonprofit platform), Araize (geared for mid-sized charities), MoneyMinder (for individuals or small nonprofits), or an app like Ramsey Solution’s EveryDollar.
Here’s a step-by-step process for creating your nonprofit budget (regardless of which platform you use):
- Predict Your Revenue – This can be the toughest part since you probably depend on donations and grants for most of your income. In a post on “The Art of Forecasting Contributed Revenue,” the Nonprofit Finance Fund offers a method for ranking sources of revenue based on how reliable you think they will be in the coming year.
For example, money you are certain about receiving would fall in the category “A” and be given a value of 100%. Categories “B, C, and D” would represent other sources that you are less sure of with percentages reflecting that.
If you got a particular grant (say, $10,000) in the past but are only 50% sure of getting it again this year, you would conservatively budget $5,000 as anticipated revenue for that item.
Contacting previous donors early to secure at least a pledge for the upcoming year will greatly help you predict your revenue accurately. - List Your Expenses – This is easier since you have concrete numbers to work with here. As we mentioned earlier, be sure to separate fixed expenses from variable expenses.
Because nonprofits are so accountable to their donors, it will also help to distinguish between “operating expenses” (money it takes to keep the lights on) and “program expenses” (money spent on the actual mission of your organization). - Include Non-Monetary Contributions – Donations such as office space, equipment, and volunteer hours have value. And they are things you are able to avoid spending money on. Therefore, they should be included as a form of revenue and an expense to cancel each other out while still being represented in your budget.
Plus, you must report these at the end of the year on Form 990. - Develop a Draft Budget – Put all of these figures together in a draft document so you can see everything in one place. With your budget team, check each line for errors or discrepancies.
- Review the Draft Budget – Once you know the budget is correct, go through it with your full leadership team to make sure it meets your organization’s goals and mission. Make adjustments as you get feedback, and prepare a final version.
- Present Budget for Approval – Print several copies to be distributed to your board or any other parties necessary for approval.
(Propel Nonprofits has put together a good 10-step checklist that you may want to consult as well.)
- Budgetary Approval
Once you have a final document to present, schedule a board meeting specifically for discussing and approving the budget. It’s important enough that you don’t want other business items competing with it for attention.
In fact, as part of your initial planning process, be sure to get this meeting on the calendar well in advance of the end of your fiscal year so that everyone knows about it and you can have a good budget in place before your next year begins.
Meet Your Nonprofit Goals With Help From The Pros
For over 40 years now, our team has enjoyed working with all kinds of nonprofit organizations to help them with their budget planning and tax filing needs. Freeing them up to serve their communities better by making money matter easier is one of our favorite things. Schedule a call today to learn more about creating a great budget plan for your nonprofit.
