Nonprofits need to get their finances in order if they want to see any real change happen. Every dollar counts, and they must have a budget that actually works. Even though nonprofits differ from for-profit organizations, they still need a solid budget to keep things moving forward.
The sad truth is that nonprofits struggle with cash flow, and their average budget is only growing. And it’s anything but a small jump: data shows the average nonprofit budget is $2.2 million, up from $1.9 million in 2016.
It's tough to figure out how to budget when dealing with financial uncertainty and funding complexities. But if you want to succeed, you need to consider these factors and make a plan that works.
Why Budgeting Is Crucial for Nonprofits
While a budget is necessary for any organization, they’re even more critical for nonprofits. That’s because nonprofits operate with unique financial challenges, which can stem from the nature of funding, an organization’s mission-driven focus, and the need to balance financial responsibility with social impact. Nonprofits are so financially unique they even have their own accounting system: fund accounting.
Here are some reasons why budgeting matters for nonprofits:
- Financial planning and stability: A well-structured budget provides a roadmap for managing financial resources, ensuring income aligns with expenses.
- Resource allocation: Budgeting enables nonprofits to allocate resources tactfully and strategically across different programs and initiatives.
- Mission alignment: Budgeting ensures financial decisions and resource allocation align with an organization's mission and values.
- Transparency and accountability: Nonprofits are accountable to their stakeholders, including donors, beneficiaries, and the community, and a budget allows nonprofits to demonstrate transparency.
- Long-term planning: Budgets allow nonprofits to execute strategic multi-year financial goals.
By creating a realistic budget, nonprofits can make informed decisions about their spending and investments, identify potential financial challenges, and effectively allocate resources to meet their mission. But in order to do that, they need to understand the basics.
Understanding the Basics of Nonprofit Budgeting
Organizations might first collect financial data from previous years and review financial documents to gain insights into the organization’s financial history (such as nonprofit bookkeeping data). Then, they will list all potential sources of income (which, for nonprofits, includes donations, grants, membership fees, fundraising events, and earned income) and expected expenses. These might include program expenses, administrative expenses, fundraising expenses, and any other relevant categories.
Budgeting for nonprofits also involves calculating projected net income and allocating a portion of the budget for reserves. After a budget is created and put to work, nonprofits will monitor and track the actual financial performance against the budget. Then, leaders might adjust the budget if the actuals differ from the projections.
Nonprofit budgets are created for a set period of time, such as for a quarter or a fiscal year.
Key Components of a Nonprofit Budget
Nonprofit budgets have a few key components, some of which are specific to this space. They include:
- Income: Nonprofit income sources include donations, grants, earned income, and membership fees. An organization will estimate the amount it expects to receive during the lifecycle of the budget.
- Expenses: Nonprofit expenses include program costs, administrative expenses (such as rent and utilities), fundraising costs, and professional services (including legal counsel or consultants).
- Net income: A nonprofit can understand its projected net income by calculating the difference between total income and total expenses. A surplus occurs when income exceeds expenses, while a deficit occurs when expenses exceed income.
- Reserves and contingency funds: A portion of the budget might be allocated to cover unforeseen expenses or emergencies.
- Project-based budget: Sometimes, budgets will be created for specific programs or projects. This can help allocate resources to different initiatives based on their unique requirements.
Budgeting Process for Nonprofits
A nonprofit budget is created using a multi-step process, creating a detailed financial plan that aligns with the organization's mission, goals, and resources. While the specific process may vary based on the organization's size, complexity, and structure, this is generally what the nonprofit budgeting process looks like.
Setting Budget Priorities
Before the budgeting process even begins, there must be clear priorities for the budget so it’s created to maximize the impact of financial resources. Setting budget priorities involves making thoughtful decisions about where to allocate funds to best advance the nonprofit's mission.
Setting priorities for a nonprofit budget might involve aligning the budget with the organization’s mission and goals, assessing the impact and effectiveness of individual programs, and considering the needs of stakeholders. It also might involve reviewing past performance data to identify high-performing programs and to determine the effectiveness of past budgeting efforts.
Developing a Budget Timeline
Budget timelines can vary depending on your organization’s specific preferences. Often, budgets are created for a one-year period, which can start or end at any time. This is called a fiscal year, and your organization might choose to operate on one that aligns with its revenue cycle.
A nonprofit budget can also be drawn up for other amounts of time, such as quarterly or monthly. While this is less typical, more frequent budgets can be useful for organizations where predicting revenue and expenses is challenging. For example, if grant and donation figures often fluctuate dramatically, addressing your budget more frequently might be beneficial.
Engaging Key Stakeholders
Certain stakeholders should be involved in the nonprofit budgeting process. It’s crucial to engage with them to ensure the budget reflects the organization's mission, meets the community's needs, and garners the necessary support.
First, determine who the key stakeholders are in your organization. This might include board members, staff, volunteers, beneficiaries, donors, and community members. Then, stakeholders can participate in meetings and workshops to discuss the budgeting process and its connection to the nonprofit's goals. This input can inform the budget and ensure it reflects the organization’s mission.
Drafting and Reviewing the Proposed Budget
When creating your nonprofit budget, a drafting and reviewing process will typically occur. After all the financial data is compiled, income and expenses are calculated, and program-specific budgets are determined, the budget will be formally drafted. At this stage, the budget draft will be reviewed for accuracy to ensure it’s correct and reflects the original budget priorities.
This process can also involve receiving and incorporating feedback, meaning several budget drafts might be created. It’s also possible your organization has protocols for presenting the budget to the board of directors or a budget committee.
When the budget is finalized, it will typically be proposed to the board for review and approval.
Connecting Nonprofit Budgeting and Strategic Planning
A nonprofit budget isn’t just a financial document: it can be used as a strategic planning tool to ensure the organization’s finances can achieve its loftiest goals. For this reason, a nonprofit’s budget should be aligned with an organization’s strategic planning.
How Budgets Support Strategic Goals
When a nonprofit budget is properly created, it acts as a financial blueprint outlining actionable steps an organization can take to achieve its strategic goals. That’s because a well-crafted budget ensures financial allocations are dedicated to programs, projects, and activities that drive progress.
By quantifying the costs associated with strategic objectives, budgets clarify resource requirements, enabling decision-makers to make informed choices about resource allocation, timeline management, and performance evaluation.
Budget Adjustments to Meet Strategic Priorities
The nonprofit landscape is incredibly dynamic, and it’s important that an organization remains nimble in its budget and adjusts it to meet evolving strategic priorities. As circumstances change and new opportunities arise, nonprofits must be flexible in reallocating resources for alignment with their mission-driven goals.
Because of this, a nonprofit budget should be continuously monitored and reviewed to identify any disparities or areas requiring additional resources. The performance of a budget should also be evaluated, and decision-makers should stay alert to new opportunities that align with the organization's mission and strategic direction. Nonprofits can also practice flexible resource allocation as priorities shift so that resources are moved from less critical areas to those directly contributing to the organization's goals.
Need Help Building a Budget for Your Nonprofit? We’ve Got You Covered
A nonprofit's budget is a crucial financial weapon that outlines how it will allocate and earn its financial resources. With a well-planned budget, a nonprofit can effectively maximize its impact and achieve its goals with a cutting-edge approach.
If your nonprofit budget could use a bit of help, let us take it from here. Hiline specializes in accounting for nonprofits, and our financial experts know nonprofit budgets inside and out.
Let us focus on your budget, so you can focus on moving mountains. Contact us to start building your nonprofit budget
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