Would you drive to a destination you’ve never been to before without directions? Probably not. Would you spend your organization's money without knowing where it was coming from or going to? Definitely not.
A budget is a vital tool that needs to be well-constructed and strictly followed if the business is to stay financially healthy. For nonprofits, budgets not only help make sense of revenue and expenses, but they play a crucial role in planning. When revenue sources like grants may be mere hypotheticals during extended application processes, it’s all the more important to plan for an uncertain financial future.
Without a solid projection for the year ahead, nonprofits are in danger of underfunding their core initiatives or missing out on important supplemental opportunities.
Keep reading to learn nonprofit budget basics so you can build the perfect roadmap for your mission’s success.
What is a nonprofit budget?
Every business needs a plan, and nonprofits are no different. In fact, because of the high accounting standards nonprofits are held to, budgets are especially important.
Unlike a for-profit business, the tenuous nature of nonprofit funding poses extra challenges to these types of organizations. A budget helps to nail down exactly what the organization wants to accomplish in the coming year and exactly how much funding they will need to do it.
Essentially, a nonprofit’s budget acts like its business plan.
When should you make your nonprofit budget?
If you’re planning out your organization’s finances for the year ahead, you’ll want to give yourself plenty of time to do so. That’s because the process for building and approving a nonprofit budget involves multiple parties.
Normally a budget will be built by staff or a committee. And once that budget’s complete? It then goes to the board for approval. Nonprofit budgeting is a group effort. And if you’ve ever been part of a group project, you know that it comes with plenty of discussion and revision. Begin the process at least a few months in advance of the upcoming fiscal year to give yourself a sufficient buffer.
Board approval isn’t the end of the line for your nonprofit’s budget. Because your budget is built on projections and estimations, it will no doubt go through corrections and adjustments throughout the year. This will allow your organization to account for the realities of income and expenses in real time.
Where to start? Expenses or Income?
Mapping out your nonprofit’s budget can feel a little like a “chicken or the egg” scenario. Where to start? In theory you can start with either expenses or income since ultimately the budget will need to balance out.
If you start with income/revenue, you’ll be projecting the amount of funding you expect to receive from donors, fundraising efforts, grants, and endowments for the year. It’s important to meticulously track revenue sources since each may have restrictions for allocation pertaining to specific projects. These projects should be each be itemized individually.
Remember that these are estimates – ensure you remain realistic. Otherwise, you may find halfway through the year that you’ve missed the mark and won’t be able to accomplish the activities you’d planned. Need help keeping it real? Use your financial statements from the previous year to help create realistic projections.
Speaking of activities, the second step in mapping your budget is estimating your organization's expenses for the upcoming coming year. Expenses can be broken down into categories such as administrative, programming, and fundraising. They can then be broken down further into indirect costs (think overhead), direct costs (think a specific project or program), and in-kind gifts (think goods and services).
Once you have these two pieces of the puzzle, it’s time to match up your revenue sources with your expenses until you get to a zero balance. Remember that those indirect costs are recurring expenses, so make sure you are allocating reliable funds to cover them.
What’s the difference between an operating budget and a capital budget?
So what do your revenue and expense projections add up to…besides zero balance harmony? Your operating budget.
Your operating budget is what will guide your organization when planning its short-term goals. Similar to a for-profit business, your operating budget will not only help you manage your finances, it will help reveal places where you can improve and revise in coming years.
But what about the long-term goals and expenses of a nonprofit? The items and projects that aren’t necessarily paid off within a single fiscal year?
Nonprofits use a separate capital budget for keeping track of long-term investments in certain assets. Things like land, facilities, and equipment may be large purchases that support an organization's mission, but cannot be paid off within the budget’s time frame. A capital budget allows an organization to manage these investments separate from the operating budget for the year.
Ready to get to work?
The key ingredients for a successful nonprofit budget are flexibility and transparency. Nonprofits must operate as open books to the public when it comes to their finances. They must also be able to roll with the punches or windfalls as they navigate their fiscal year of funding and expense realities. Without an organized plan in place, a nonprofit might find itself with a deficit it could have otherwise avoided.
Need help identifying your fixed costs? Reach out to KYN Accounting today for friendly insight into your nonprofit’s budget.