Your nonprofit’s operating budget helps your organization accomplish its goals by planning out its expected annual income and expenses. Understanding how to allocate funding to ensure a balanced budget is an important skill for nonprofit professionals, even those who don’t specialize in finances. 

Financial management should work alongside fundraising to further your mission, especially with budgeting, which should be a collaborative process. To help your organization create a budget it can stick to, we’ve broken the process down into four steps. Let’s dive into each one!

1. Define the Types of Budgets You Need

While your annual operating budget (the document that outlines all of your revenue by source and program and overhead costs for the year) is probably what comes to mind when you hear the term “budgeting,” it isn’t the only budget you might need. 

For example, you might also create: 

  • Capital budget. Some nonprofit projects (such as capital campaigns) span multiple years, and this type of budget accounts for them. 
  • Program budget. Program budgets record the revenue and expenses related to launching a specific mission-driven initiative. 
  • Grant proposal budget. Grantmakers often require a specific breakdown of how you will use their funding if your organization receives the grant. 

As Jitasa’s guide to fund accounting explains, a key differentiating factor in nonprofit budgeting is that your organization has to account for restricted funds. While businesses may earmark funds for specific projects, they rarely have restricted funds that can only be spent on specific projects. In contrast, nonprofits regularly receive large gifts—such as from grantmakers and major donors—that must be spent how the donor intends.

Multiple budgets allow you to better manage your finances for specific projects and your organization as a whole. For example, individual program budgets detail how you’ll get new efforts off the ground, while your operational budget lets you get a bigger picture of where funding is going across all initiatives. 

2. Create a Budget Document

Once you know which type of budget you’re creating, it’s time to start making it! Your nonprofit budgeting document should have two main sections: revenue and expenses. Let’s look at each one in more detail.

Revenue

When predicting your revenue, use your past fundraising records to determine what you expect to earn this year. Consider your fundraising campaigns, grants, and other revenue streams, and organize your projections by source. Your finance team may calculate the exact amounts that are feasible for your nonprofit to bring in manually, but technology-driven cash flow forecasting is becoming more common to streamline the process.

Either way, accurate forecasting ensures you have the funding to cover expenses. When in doubt, be cautious and assume you will have less revenue coming in. After all, it’s better to have an unexpected surplus to distribute to programs in need than to find yourself with a shortfall and have to cut something last minute. 

Expenses

The expense part of your budget should be organized based on how your spending furthers your mission. To accomplish this, use the functional expense categories of administrative, fundraising, and program costs. However, you should also break them down further to ensure all expenses are covered. For example, within your administrative expenses, you’ll have costs associated with utilities, employee compensation, and office supplies. 

Again, review your past to predict the future. Look through your previous expense reports to estimate your expenses for the upcoming year. Also, consider the new programs and projects you expect to take on, which may be more difficult to predict costs for.

3. Present Your Budget to Your Board

After you’ve crafted your budget, you’ll present the final product to your nonprofit’s board of directors. They have to approve or reject your prepared budget before you move forward with it. 

Make sure you’re prepared to answer any questions they may have about the numbers you present. The trick to this is to make sure all of your data is clean and hygienic. According to Double the Donation’s data hygiene guide, data decays at a rate of about 30% each year. By maintaining clean data, you can ensure your numbers are accurate and that you have a budget with up-to-date information to share with your board. 

The next step is to predict the types of questions your board members may ask. Prepare to discuss how you’ve predicted certain amounts of revenue will occur and where your expenses will be directed. Put yourself in their shoes and proactively provide the information they need to make a sound decision about your budget.

4. Revisit Your Projected vs. Actual Budget

Once you create a budget, your organization needs to make a dedicated effort to use it. Reference and re-reference your budget document as a financial guide throughout the year.

On a monthly or quarterly basis, pull reports such as statements of cash flows and budget vs. actual comparisons. These provide financial data that you can compare to the numbers featured in your budget, helping you stay on the right track throughout the year. 

More than that, you can use the numbers in these reports to calculate helpful financial ratios. These allow you to discover additional insights into your organization’s finances that you can use for crafting future budgets. For example, if your nonprofit’s operating margin ratio is positive, you might be able to develop a multi-year expansion plan for your nonprofit to grow, which may necessitate capital and grant proposal budgeting along with a new strategy for upcoming operating budgets.

Crafting and using your nonprofit’s budget throughout the year can be challenging, but by following these steps, you can develop a strong financial plan. If you encounter challenges creating your budget, you can always consult a nonprofit accountant or financial advisory professional who will help you craft your budget and make an effective plan to stick to that budget for sustainable growth.

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