In today’s ever-changing world and volatile economy, non-profit organizations continue to struggle with maintaining their operations. To enhance its financial sustainability, non-profits must commit to proper financial management strategies. One way around this is by creating a nonprofit budget, which serves as a guide for the organization’s financial activities for months. Again, organizational staff and board members refer to the nonprofit budget throughout the year when making financial decisions. This article covers the basics of nonprofit budgeting and the best practices for successful budgeting.
What Is a Nonprofit Budget
A non-profit budget is a financial document that gives a breakdown of how a non-profit organization will plan and track its finances for a specified duration. Ideally, the budget reflects the financial obligations that the nonprofit will achieve over the stipulated period. Typically, nonprofits create budgets for upcoming capital campaigns, fundraising campaigns, and fiscal year. Once reviewed and accepted, the non-profit budget becomes an important financial management tool for the organization. On the one hand, the budget can be used to monitor ongoing financial activities and help a non-profit business compare its actual performance against the budget (financial plan).
Importance of Budgeting for Nonprofit Organizations
A budget substantiates the financial plans of a non-profit organization. Therefore, through its budget, a non-profit can make a strong statement about its plans for the year and monitor its progress. This includes a highlight of what the organization projects to achieve in the coming months or years. But why is a nonprofit organization budget important?
For Strategic Forecast
Most non-profits rely on large events to raise substantial amounts on their annual fundraising campaigns. While this is a successful strategy for most nonprofits, very few attach realistic values to these events. A budget makes it easy for nonprofits to forecast the expenses and projected revenue streams of an event for better financial decisions.
To Inform Donors
Most donors today are quite savvy. They want to know where their donations are going to, and any ‘worthy cause’ will encourage them to continue supporting the non-profit organization. A nonprofit budget is one way organizations can convince their donors that they are up to a worthy cause.
To Satisfy Board Members
A nonprofit organization budget makes it easy for the board members to comprehend the details around its financials. Every board member is satisfied knowing the initiatives and programs that are successful and those that failed.
Main Budget Types
As per the requirements and financial needs of a non-profit organization, there are two key types of budgets. They include:
A capital budget contains the details of the sale and acquisition of assets. It is used to determine the viability of proposed fixed asset purchases. Through a capital budget, a non-profit organization can establish the optimal time frame for purchasing long-term assets. Also, organizations can plan on the best method of financing such purchases.
A typical capital budget includes the following;
- Details around the capital needs of an organization.
- Capital budget net amount as per the predetermined sources of funding.
An operating budget is an annual financial plan of a non-profit organization, detailing the expected costs and revenues of its operations. The budget focuses on current operating expenditures and income or revenue. Ultimately, an operating budget is used to derive the organization’s operating profit margin and pro forma income statement. Examples of revenue items captured in the nonprofit operating budget include grants, annual events, and donor contributions. On the other hand, expenses would include professional fees, taxes, and salaries.
Non-Profit organizations use event budgets as a tool to set financial goals for their upcoming events. The budget looks into the financial aspects of a non-profit organization’s goals, including appreciation, program awareness, and organizational consciousness. Event budgets are also a great way to forecast the fundraising potential of a stipulated event.
Things to Consider When Creating Your Nonprofit Budget
Non-profit organizations depend largely on donations to accomplish their objectives and run routine operations. However, donations and other revenue sources for these organizations are subject to change, which is why proper budgeting is essential.
Here are some things to consider when creating a non-profit budget.
Forecasting an achievable and accurate timeline for your budget is a critical component of non-profit budgeting. A verifiable budget timeline enables the organization to achieve its financial goals by organizing day-to-day activities into a realistic plan. To develop an ideal budget timeline, non-profits must consider several variables, including projected costs and financial goals. Also, nonprofits must ensure that there is a balance in projections and expectations when coming up with a budget timeline.
One segment of an annual nonprofit budget constitutes the revenue sources of the organization. Generally, this section defines how much a nonprofit will spend, depending on the amount of money received. To formulate the income sources segment of the budget, nonprofit organizations must evaluate their past successes with their various funding sources. Examples of such sources include grant writing and major donors.
Grant writing refers to the process of applying for a financial grant from various institutions and bodies, such as foundations, charity organizations, governmental agencies, and trusts. When budgeting for a grant, nonprofits should indicate the cost of their specified projects, what the grant will cater for, and how other projects are funded.
Major donors play a very critical role when it comes to budget formulation. Whether a single major donor has been secured in a fiscal year or not makes a whole lot of difference for a nonprofit. This is why it is pivotal for nonprofits to continuously appreciate their donors and encourage them that their contributions are in for a noble course.
Static expenses are those costs that a nonprofit incurs from month to month consistently. When creating an annual nonprofit budget, static expenses must be incorporated into the plan. Such expenses include the following;
- Office rent
- Utility bills
- Software investments
- Employee paychecks
- Consistently funded programs
Notably, static expenses constitute a larger proportion of the operating costs of a non-profit organization. This means that the operations segment of a nonprofit budget is largely composed of these costs.
Variable expenses are those costs that tend to fluctuate from time to time. They are unpredictable and can be quite overwhelming to plan for in a nonprofit organization budget. Examples of variable expenses include the following;
- Fundraising expenses
- Marketing costs
- Event expenses
Variable expenses are less risky than static expenses. This is because variable expenses only tend to change when needs arise, unlike static expenses that remain constant. Nonprofits can analyze their variable costs from their previous year’s records.
Best Practices for Nonprofit Budgeting
For most nonprofits, creating an annual budget is a tedious process that most organizational leaders shy away from every year. However, with the ideal budgeting practices, nonprofits can boast of a streamlined process. These are the best non-profit budgeting practices.
Keep High Bookkeeping Standards
Typically, nonprofits rely on records and data to dictate their financial decisions and projections. Therefore, to formulate an efficient nonprofit budget, organizations must start with high bookkeeping standards. Bookkeeping refers to the practice of keeping financial records, which must be done by the highest of standards.
Ideally, high bookkeeping standards include such practices as follows;
- Being timely when recording transactions.
- Keeping organized ledgers.
- Timely allocation of costs.
Analyze Budgets Annually
Budgeting is not a one-time activity. For organizations creating nonprofit budgets for the first time, it might be incredibly difficult to be accurate. However, as time goes by, organizations become more accurate as they master the practice of forecasting expenses and revenues. Also, analyzing budgets annually enables nonprofits to predict variable expenses while evaluating the possibility of adding another static expense.
Organizations are recommended to hire professionals or outsource experts for annual budget analysis. This will help them to save time and money. Additionally, nonprofits need to use technology for budget creation, analysis, and forecasts.
Be Realistic of Your Income
Some income sources, such as donations, can pose serious challenges if board members are not realistic. Most donors, for example, may demand that all their funds be directed to specific programs. Donors’ expectations must be looked into with care.
Otherwise, the nonprofit might have to deal with high overhead costs if the programs are not analyzed as a percentage of total expenses.
Also, consider categorizing your income based on your estimates. For example, if you have gifts that are unlikely to be repeated in the coming years, then you can remove them from your income projections.
Consider Unexpected Expenses
Sometimes revenue streams may not come in as expected, and some unexpected expenses can crop up. Examples of unexpected expenses include;
- Medical expenses
- Emergency expenses
- Unplanned travel
- Hidden costs
There is no way nonprofits can predict unexpected expenses. However, there are several ways through which such expenses can be taken care of. An ideal nonprofit budget should be able to accommodate and provide for any unplanned expense. For example, budgeting for medical insurances can help mitigate unexpected medical expenses.
Keep Operating and Capital Budgets Separate
Nonprofits should budget their operating expenditures separate from other expenditures, including capital expenditure. This separation comes with a wide range of benefits, including easy calculation of taxes. For example, deductions for operational expenses apply to the current tax year. However, for capital expenses, tax deductions are spread throughout the year in the form of amortization or depreciation.
Monitor Your Nonprofit Budget Regularly
Monitoring and reviewing a nonprofit budget regularly helps organizations advance their financial goals and cut unnecessary expenses. Taking time to review the budget enables nonprofits to look at the budget beyond the daily routine. As a result, they can improve their financial decisions in the future based on the current budgetary progress.
Nonprofit Budgeting for Dummies
Without a budget, a nonprofit would be operating in uncertainty. This can result in high expenses and low revenue, making it difficult for the organization to achieve its mission. Uncertainty can also push donors away, as most funders are interested in knowing how their donations are used.
This guide has the necessary principles and fundamentals of nonprofit budgeting for dummies and experienced organizations. These basics will help nonprofit organizations to keep up with the demands of an ever-changing global economy for sustained financial health.
Nonprofit Budget FAQ
Does a nonprofit budget have to balance?
The answer is, no. Nonprofits exist to fulfill their charity missions and not to make profits. In pursuit of fulfilling their missions, a nonprofit may need a deficit and surplus budget instead of a balanced one.
What is an operating budget?
An operating budget is a non-profit’s financial plan for a specified period. The budget details the projected costs and revenues of the organization’s operations.
How much should nonprofits spend on marketing?
Different nonprofits spend varying proportions of their budgets on marketing. However, marketing specialists suggest that an average nonprofit should only spend between 10% and 20% of their total budgets on marketing.
Is there an acceptable overhead percentage?
Generally, a nonprofit should aim at having an overhead ratio that does not exceed the 35% mark. Most nonprofits have their overhead rates lie between 10% and 35%.
What percentage of a nonprofit budget should be salaried?
The proportion of salaries to a nonprofit’s total expense may vary from one organization to another. However, most nonprofits have their salaries account for 50% to 75% of the organization’s total expenses.