Building a nonprofit budget: Master guide & template

Let's face it: building an annual operating budget isn't exactly a thrilling topic. But for nonprofit leaders like you, it's the backbone of your organization's success. Every dollar counts. Think of your budget as your financial GPS – it tells you where your organization is, the mission you’re trying to accomplish, and how to accomplish more for your cause without running out of gas.

But the sad truth is that nonprofits struggle with cash flow, and the average nonprofit budget is only growing, leaving more money to juggle – jumping from $1.9 million in 2016 to $2.2 million in 2022.

In this guide, we'll walk you through building a nonprofit budget that works for your organization and your board. We'll cover why it matters, when to start, what to include, and how to use it throughout the year. 

No fancy jargon, no complex formulas – just straightforward advice to help you navigate your financial operations journey and carry out your organization’s mission.

What is an operating budget for a nonprofit?

Your nonprofit operating budget is your financial game plan for the year. It's not just a bunch of numbers – it's your mission, translated into dollars and cents. It shows:

1. Operating costs and expenses, or how you’re planning to spend your money.
2. Money coming in for the year, whether through grants, funding, donations, dues, etc. 
3. A 12-month outlook – It's your best guess at what you'll achieve financially over the next year. 

Every month or quarter, you'll compare what actually happened with what you planned. Did you spend less than expected on office supplies? Go you! Did that new program cost more than anticipated? Time to adjust.

It's a tool to help you do more of what matters. So embrace it, use it, and let it help you change the world more effectively.

Why nonprofit budgeting often takes a back seat

We know you're not avoiding your budget because you enjoy financial chaos. You're caught in a time trap that's all too common for nonprofit executive directors. 

Here's what's likely eating up your time:

1. The 9-to-5 (more Like 24/7) grind – You're juggling donor calls, staff meetings, and program oversight from sunrise to sunset. Your day job doesn't leave much room for number-crunching.
2. The nonprofit juggling act – With a to-do list longer than a CVS receipt, budgeting often gets pushed to the bottom. There's always a more urgent fire to put out, right?
3. The "where do I even start?" paralysis – Staring at a blank spreadsheet can be as intimidating as facing a blank canvas. Without a clear starting point, it's easy to keep putting it off.
4. The bookkeeping blues – Your bookkeeper doesn’t specialize in or deeply understand the ins and outs of nonprofits. Sure, they can balance your books, but you lack an in-depth budget backed by a strong strategy. 

Plus, you didn't sign up to be a nonprofit executive director because you love creating budgets. You're here to make a difference, not to wrestle with spreadsheets.

So, how do you break free from this time trap? It might be time to call in the cavalry. Whether that's delegating more, investing in better accounting, or bringing in outside help (hey there, we know a thing or two about nonprofit finances), remember: asking for help is a smart move that frees you up to focus on your mission.

In the following sections, we'll show you how to create a strategic budget that works for you, not against you or your time.

Why your annual operating budget matters

You might be wondering, "Do I really need a formal budget? Can't I just wing it based on where grants have already told me where to allocate?" 

Short answer: no. Here's why your budget and the strategy behind it are crucial:

1. It keeps you compliant – Your budget isn't just a suggestion. It's often a legal requirement. Plus, it gives your board the info they need to do their job. 

2. It's your crystal ball (sort of) – While it can't predict the future, a good budget helps you plan for it. It forces you to think ahead, make smart decisions about your programs and resources, and helps you track your cash to avoid stomach-dropping surprises.
3. It's your ticket to funding – Grants and major donors want to see that you're managing money wisely. A solid budget shows them you mean business and know how to make their dollars count. 
4. It keeps your mission on track – Your budget ensures you're spending money on what matters most – your mission. It helps you focus on your goals and avoid getting sidetracked. 

When to start the budgeting process

You (and many others) might be tempted to put off budgeting until the last minute. But trust us, your future self will thank you for starting early and giving yourself the best shot at creating a budget that genuinely serves your organization.

Your budget timeline should align with two key factors:

1. Your fiscal year – Most nonprofits align their budget with their fiscal year. For example, if yours starts on July 1, you'll want to have your budget ready well before then.
2. Grant cycles – Know your grant deadlines and build your budget timeline accordingly. This way, you're not caught off guard by funding requirements or application deadlines.

Here's a rough timeline to keep you on track if you’re following a normal calendar year budget:

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You can also draw up a nonprofit budget 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.

Steps to create your annual budget

Alright, it's time to roll up your sleeves and get budgeting! Don't worry; we'll break it down into bite-sized steps that won't give you a financial headache.

Step 1: Take stock of where you're at

Before planning for the future, you need to know where you stand in the present moment. 

1. Review your current year's numbers and actuals for each department in your organization. What's working? What's not? Use this as a baseline
2. Identify your steady Eddies – those consistent programs and funding sources you can count on. 

Step 2: Gather intel from key stakeholders 

Now's the time to put on your detective hat and gather information from your team. This might include board members, staff, volunteers, beneficiaries, donors, and community members. Be sure to get input from your department or program heads as well. Then, stakeholders can participate in meetings and workshops to discuss the budgeting process and its connection to the nonprofit's goals. 

But what to ask? 

Figure out if there are going to be significant changes. For example, will you have a new funding source that you'll have to separately track or are you going to lose a funding source? Use this intel to start adjusting your budget from your current baseline.

Step 3: Start building with a nonprofit budget template

After you compile all the financial data, calculate incomes and expenses, and determine program-specific budgets, you’re ready to start drafting. 

So, let's talk budget templates. We know, spreadsheets aren't exactly thrilling, but stick with us – this one's a game-changer.

We're big fans of keeping the budget simple yet effective with our go-to customizable Excel template. This template will serve as an overview once you combine the budgets for all your programs and departments. Keep in mind that you’ll need to adjust the template based on your program needs and your existing chart of accounts. From there, it’s plug and go!

Step 4: Review. Rinse. Repeat

Rome wasn't built in a day, and neither is a great budget. 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 you might create several budget drafts. Here's how we approach it at Hiline: 

Step 5: Get the board on board

It's time to present your budget to the board or your budget committee. But don't just dump a spreadsheet on them.

1. Prepare a clear, concise presentation.
2. Highlight key points and any significant changes.
3. Be ready to explain your reasoning.

Step 6: Cross the finish line

After board feedback, make any final tweaks and get that budget approved.

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Key components of a nonprofit budget

Now that you know how to create your budget, let's break down what should actually go in it. Think of your budget like a puzzle – each piece is important, and it all needs to fit together to give you the whole picture. You can also use this list to help customize our template.  

Nonprofit budgets have a few key components, some specific to this space. They include:

1. Revenue projections or income

First up, let's talk about where your money's coming from and make a list of the following:

• Grants and restricted funding 
• Donations and unrestricted funding 
• Program revenue or money you earn from services or products

2. Expenses

Now for the not-so-fun part – where that money needs to go.

• Program expenses – The bread and butter of your mission.
• Administrative costs – The unsexy but necessary stuff.
• Fundraising expenses – Gotta spend money to make money, right?
• Reserves and contingency funds – A portion of the budget might be allocated to cover unforeseen expenses or emergencies.

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3. Staffing and payroll

Your team is your greatest asset, so plan accordingly.

• Full-time staff costs
• Part-time or seasonal staff needs
• Benefits and payroll taxes

4. Capital expenses or big ticket items

Planning any major purchases? Don't forget to budget for them.

• Equipment upgrades
• Facility improvements
• Technology investments

5. Cash flow

Last, but not least, plan out when money's coming in and going out.

• Map out your cash flow by month
• Identify potential tight spots
• Plan for how to cover any gaps

6. Project-based budget

Sometimes, you’ll create budgets for specific programs or projects. This can help allocate resources to different initiatives based on their unique requirements.

Common budgeting pitfalls to avoid

Even the best of us can stumble when it comes to budgeting. But hey, forewarned is forearmed! Here are some common budget blunders and how to sidestep them:

Pitfall 1: The copy-paste trap

You might be tempted to just dust off last year's budget, change a few numbers, and call it a day. 

Fix: Take a fresh look each year. Your organization is evolving, and your budget should too.

Pitfall 2: Oops, we forgot admin costs

It's easy to get caught up in program costs and forget about the behind-the-scenes expenses that keep your nonprofit running."

Fix: Make a comprehensive list of ALL your costs – glamorous program expenses and unsexy admin costs alike.

Pitfall 3: The "free money" fallacy

Getting a big grant is exciting, but remember, restricted funds aren't a blank check.

Fix: Clearly track restricted and unrestricted funds. Know exactly what each dollar is earmarked for.

Pitfall 4. The staffing surprise

Forgetting to account for seasonal staffing needs or underestimating personnel costs can throw your whole budget out of whack.

Fix: Think through your staffing needs for the entire year. Don't forget about benefits, taxes, and potential raises.

Pitfall 5: The mission-budget mismatch

Your budget doesn't reflect your organization's goals and mission.

Fix: Review your strategic financial plan before you start budgeting and ensure each budget line item supports a strategic goal. Ask yourself: "How does this expense help us achieve our mission?"

Pitfall 6: The lone wolf budgeter

You created the budget in isolation, without input from key stakeholders.

Fix: Make budgeting a team sport by involving program managers, finance staff, and board members in the process. Use the budgeting process as a chance to build understanding across your organization.

Pitfall 7: The pie-in-the-sky budget

You created an overly optimistic budget that sets unrealistic expectations.

Fix: Be ambitious but realistic. Use historical data as a reality check and factor in potential funding changes or economic shifts. Build in some wiggle room for unexpected expenses.

Pitfall 8: The rigid budget blues

Nonprofits often get stuck following grant guidelines too rigidly and creating a budget that can't adapt to changing circumstances.

Fix: Build in flexibility and contingencies. Create multiple budget scenarios (best case, worst case, most likely) and include a contingency fund for unexpected expenses. Plan for regular budget reviews and adjustments throughout the year.

Pitfall 9: The spreadsheet nightmare

Accounting and budgeting are complex, and doing it manually with error-prone spreadsheets or outdated tools makes it more difficult. 

Fix: Learn to leverage technology effectively. Use accounting software designed for nonprofits and explore budgeting tools that can simplify the process.

Your budget. Your mission. Your impact

Congratulations! You've made it through the wild world of nonprofit budgeting. Take a moment to pat yourself on the back.

Your mission matters. Your work changes lives. And a solid budget? That's the unsung hero that makes it all possible. So go forth, crunch those numbers, and keep changing the world, one well-planned dollar at a time.

And if you're feeling overwhelmed, you don't have to go it alone. There's no shame in asking for help from a financial pro who speaks nonprofit. Hiline specializes in accounting for nonprofits, and our financial experts know nonprofit budgets inside and out. We even have a special offer for nonprofits who need help getting on the right track. Because your budget should be as unique and impactful as your nonprofit. Now, go make it happen!