In a perfect world, every nonprofit board would have a budgeting expert in the boardroom, and optimizing your nonprofit’s budget would be simple. If that’s not the case for your nonprofit, your board members can still work on improving your nonprofit’s performance by using the best budgeting practices for nonprofits.
As responsible board members, you regularly make many choices about spending and allocating the organization’s money. In making decisions about allocating funds, nonprofit board members must consider their primary goals and objectives 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 your donors’ money, it’s crucial for you to carefully oversee the nonprofit’s budget. You can do that by understanding budgeting basics, planning for flexibility, and breaking your budgeting processes down into steps.
Budgets give your nonprofit a sound measure of how much income you anticipate receiving, enabling you to allocate how to spend it. The two essential 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 your board wants to spend on programs that support the mission and any other expenses you anticipate coming up over the next year.
Looking beyond the budget basics, income and expenses are rarely fixed, so it’s essential to build some degree of flexibility into your nonprofit’s budget.
Plan for Flexibility in Your Nonprofit’s Budget
Nonprofit board members should consider their budgets as a guideline they can rely on as circumstances change. The reality is nonprofit income is volatile. A 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 take a devastating hit.
It’s the board’s responsibility to oversee the budget, so you must revisit it regularly, so you can make adjustments as circumstances change during the year.
The treasurer or finance committee works with the budget all year long, comparing it to the income and expense report to ensure that income and spending are in alignment. Financial reports help boards allocate their money more efficiently while keeping the board focused on the organization’s goals.
Responsible budgeting is also an essential factor when seeking funds from donors. Donors like to see transparency in how boards manage their funds. The community can place good faith in nonprofits that pay close attention to their budgets. Consistent budgeting practices increase a nonprofit’s reputation.
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 can be directly related 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.
5 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 entire board’s approval at the beginning of the new fiscal year.
The following 5 steps will allow you to break down the budgeting process:
- Place the budget on the agenda for board discussion. Begin prioritizing the necessary expenses to support and deliver your programs. Be sure to revisit the board’s strategic plan to make sure the new budget accounts for any increases needed to support growth and new annual goals.
- Review the income for the current year. Assess whether the following year’s income will be more, less, or about the same. You need to be realistic when making forecasts for income. Take into account such factors as the instability of the economy, the ability of donors to continue contributing, and any other extenuating circumstances that could cause lesser donations.
- Review the expenses for the current year. Consider the necessary allocations for the fiscal year. Review the anticipated expenses for the coming year and forecast the expenses for the coming year.
- Review conditions and restrictions on grant monies. Some grants come with restrictions on how boards can spend their money, so factor them into the budget as well.
- Factor in outliers and discrepancies. Analyze whether expenses are anomalies and adjust the budget accordingly.
The pandemic provides a prime example of how external factors can impact donor-giving. There was a bigger trend toward giving from wealthy households after the pandemic started. Many donors also lifted restrictions on gift-giving, allowing nonprofits to utilize donations as they saw fit. Also, wealthy individuals started to focus more on the needs of their local communities. Nonprofit boards that take note of these trends in light of regular or new donors can more easily adjust their budgets to improve the nonprofit’s financial status.
The board or finance committee can then develop a budget draft 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 it meets program and organizational goals. At this point, the board can make any final, necessary adjustments and create a final draft.
Final Thoughts on Improving Performance by Controlling the Budget
The full board is responsible for overseeing the budget. A board management system, such as BoardEffect will help to streamline the budgeting process. The platform is accessible 24/7 and all year long, giving the board secure access to the budget. Finance committees can use the system 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.