Managing a budget for a nonprofit organization is much like planning a household budget, except that there are generally more sources of income and more categories of expenses. In both cases, a sound budget is important for financial sustainability and provides a guide for financial health and sustainability.
A budget isn’t a prediction, a forecast, a target or a wish list. A nonprofit budget is a financial document that provides an overview of how the organization plans to spend its money. There are two parts to the budget — expenses and revenue. It’s crucial that the budget be centered around the primary goals and objectives of the organization.
Nonprofit budgets should be considered flexible documents. Many unexpected things can happen that greatly impact the budget. Revenue may not stream in as expected and large unexpected expenses can creep up. With proper budget planning, nonprofits can easily reap the benefits of good budgeting. Technology is an important tool for responsible budgeting for nonprofits.
Benefits to Budgeting for Nonprofits
Good budgeting demonstrates accountability and transparency, which are important issues that donors and grant-makers look for before offering funds. Donors want to know where their money will be going. Good budgets assure donors that the nonprofit is actively overseeing the budget process. Having a good budget aids board directors as well.
Maintaining a proper budget gives boards proper control. The budget paints a clear picture of how much cash is coming in and how much is going out. Budgets form the basis for boards to make better decisions and to avoid making mistakes. Budgeting allows boards to put limits on certain expenses as necessary and work to increase income sources early when it looks like there may be a shortfall. Monitoring the budget also provides an opportunity for board directors to move money around to allocate it efficiently as their cash flow changes.
Most importantly, nonprofit budgets should be constructed around the organization’s programs and activities, which will help them stay focused on their goals.
Important Considerations in Evaluating a Nonprofit Budget
The two primary components of a budget are income and revenue, and many subcategories fall under the umbrella of each.
It typically requires getting income from multiple sources for nonprofits to thrive. The budget lists all of those sources and provides an indication of the amounts the board can expect to come in from each source. Fundraising is a primary activity for nonprofit boards. Funds raised may come from ticket sales, membership fees, proceeds of auctions, galas, sales of goods or services, or other fundraising activities.
Under the heading of expenses, boards need to focus expenditures on their programs and activities. Expenses include direct costs, such as the cost of hiring new staff, ordering supplies, providing brochures or other publications, ordering supplies and travel. Capital expenditures are expenses needed to acquire or maintain fixed assets, such as fixing or maintaining buildings, land and cars. Indirect costs, which are also called overhead, include things like utility bills, internet fees and postage.
It’s important to be realistic in reviewing income sources and expenses. Board directors should be careful to consider the state of the economy and any unusual or unforeseen financial situations of their contributors.
Grant-makers have the potential to contribute large sums to nonprofits and board directors should ensure that they meet the grantor’s requirements to qualify. Donors expect to know how their donations are helping the organization so boards need to consider how they can communicate this information to donors.
Lastly, it’s rare that nonprofits have unlimited funds, so they need to be realistic and thoughtful about setting restrictions on what they can spend money on.
Developing the Nonprofit Budget
All board directors should have a good understanding of the purpose of the budget and their responsibility for developing a good working budget that supports the mission and that will lead the organization to sustainability.
Boards should begin reviewing their budgets at least three months before the end of the fiscal year. This is important so that the board will have time to approve the annual budget before the start of the next year. It helps to establish a timeline with a target date for board approval.
At the first budget planning meeting, the board or budget committee should agree on their financial goals. This will require prioritizing program delivery goals and setting organizational financial goals. This is a good time to review the current year’s actual income and expenses against the budget. Boards should analyze variances and consider if there will be any impact on the upcoming budget. This is also a prime opportunity to clarify the annual goals from the strategic plan.
The second meeting of the budget committee should focus on developing a draft of an expense budget and an income budget. The committee will need to determine the costs for the upcoming program goals, organizational goals and strategic goals. In determining the income budget, the committee will need to project income based on the current fundraising and revenue activities.
At this point, the budget committee should have a draft budget ready and do a thorough review of it. The review should include verifying that the budget is able to meet program and organizational goals. Budget planning includes some degree of forecasting and assumptions and boards should thoroughly vet assumptions before finalizing the budget. They should make any final adjustments based on the organization’s goals and its capacity to match income and expenses as closely as possible. In addition, they should review the final draft against the organization’s goals and objectives.
Finally, the board or budget committee should be ready to present the annual budget to any necessary committees and the board for final approval.
Board Management Software Solutions Assist in Budgeting for Nonprofits
Board management software is a valuable tool in assisting nonprofits in budget planning. A board portal by BoardEffect provides a secure platform for board communications where they can share confidential documents about the budget and other important board matters without concern over hacking. The platform has a feature for granular permissions so that only the people involved in budget planning can access the budget planning details.
Overall, good budget planning requires knowledgeable board directors, a solid planning process and the tools to complete the job successfully.