Individuals and corporations regularly make many choices about how they spend and allocate their money. A budget is a plan for how the organization wants to spend its money. In making decisions about allocating funds, nonprofit board members must take their primary goals and objectives into consideration and ensure that expenditures are in keeping with the organization’s mission.
Careful budgeting often makes the difference between nonprofits that can sustain themselves and those that don’t last for the long term. As providers of community services and stewards of their donors’ money, it’s crucial for nonprofit board directors to carefully oversee the organization’s budget.
Budgets give nonprofits a sound measure of how much income they anticipate receiving, which will enable them to allocate how they can spend it. The two basic parts of the budget are income and expenses.
The income portion details all of the possible sources of income. This includes membership fees, one-time donations, pledges, fundraising events, large donors, grants and endowments.
The expense section of the budget lists known expenses, such as compliance fees, insurance, supplies, promotional expenses, equipment, facility fees, utilities and other annual expenses. The expense section also lists expenses that the board wants to spend on programs that support the mission and any other expenses they anticipate coming up over the next year.
Plan for Some Degree of Flexibility Into the Budget
Nonprofit board members should really consider their budgets as a guideline that they can change as circumstances change. The reality is that nonprofit income is volatile. One large unexpected donation can be a greatly appreciated windfall. On the flip side, when a donor regularly gives large donations and then suddenly and unexpectantly stops doing so, the nonprofit’s budget can really take a hit. It’s the board’s responsibility to oversee the budget, so they must revisit it on a regular basis, so they can make adjustments as circumstances change over the course of the year.
The treasurer or finance committee works with the budget all year long, comparing it to the income and expense report to make sure that income and spending are in alignment. Tracking helps boards allocate their money more efficiently while keeping the board focused on the organization’s goals. Responsible budgeting is also an important factor when seeking funds from donors. Donors like to see transparency on how boards manage their funds. The community can more easily place good faith in nonprofits that pay close attention to their budgets. Consistent budgeting practices increase a nonprofit’s reputation.
Steps in the Budgeting Process
Budgeting is more of a process than a one-time exercise. Boards or their finance committees usually begin working on the annual budget about three months before the end of the fiscal year to ensure that it will be ready for the full board’s approval at the beginning of the new fiscal year.
The process usually begins by placing the budget on the agenda for board discussion. The board begins its discussions by prioritizing expenses needed to support and deliver their programs. This discussion entails revisiting the board’s strategic plan to make sure that the new budget accounts for any increases they need to support growth and new annual goals.
The next important step is to review the current budget. The board must assess whether the next year’s income will be more, less or about the same. It’s essential for boards to be realistic when making income forecasts by taking into account the instability of the economy, the ability of donors to continue contributing, and any other extenuating circumstances that may cause a decrease in income. Nonprofit boards also have to review whether they will continue to qualify for the conditions or restrictions of grant monies. Some grants come with restrictions on how boards can spend their money, so this has to be factored into the budget as well.
On the expense side, board members have to account for how they allocated expenses the previous year and do their best to allocate expenses until the fiscal year-end, as well as review and forecast the coming year’s expenses.
Finally, boards must analyze any outliers and discrepancies and make adjustments to the budget accordingly.
These initial discussions should help the board to form a consensus on how to best approach the new budget. Boards should have assigned roles and responsibilities for managing money and designating authority over spending. It’s wise to review these practices and policies and to document them in the board meeting minutes.
The board or finance committee can then develop a draft of a budget for the coming year. Board members will need to make projections for costs of programs, increased costs to meet strategic goals and the potential for new income streams.
Once the initial draft of the budget is ready, boards should review it carefully to make sure that it meets program and organizational goals. At this point, the board can make any final, necessary adjustments and create a final draft.
The board should approve the budget at the annual meeting and document their decision in the meeting minutes.
Boards should then review and discuss the budget with managers and provide them with copies of it.
Costs fall into several different categories. Boards can use the categories to develop a comprehensive list of expenditures.
Direct costs are easy to quantify. They’re directly relatable to a product, service, department or something else. Indirect costs are overhead costs, such as phone charges, internet service fees, postage, event expenses, and expenses for training and conferences. Boards also have to account for capital expenditures and in-kind contributions, such as office space, parking and security.
Concluding Words on Improving Performance by Controlling the Budget
The full board is responsible for overseeing the budget. A board portal is a digital tool that streamlines the budgeting process. The portal is accessible 24/7 and all year long, which gives the board secure access to the budget at any time. Finance committees can use the portal to collaborate and work on every phase of the budgeting process.
The proper tools for nonprofit budgeting streamline the process and give board directors more time to spend on developing new programs and ensuring the organization has the financial resources to support them.