Budgeting is a key component of financial sustainability for nonprofits. This is especially so, considering the fact that, unlike for-profit organizations, income sources for nonprofits are generally more unstable. Therefore, in order to keep the organization viable, and to keep its goals achievable, nonprofits must closely monitor their income and expenses via well-written budgets.
But what exactly are the considerations that should underpin budgeting for nonprofits? Are there standard practices that each organization must keep in mind as they create their budget? Is there a specific role that budgets should play for nonprofits, apart from being a mere projection of income and expenses?
In this article, we explain the primary role that a budget plays for nonprofits and tips for creating a functional budget.
What role does a budget play for a nonprofit?
Traditionally, nonprofits use budgets to estimate income and expenses over the projected period. But budgeting is more than just this. In terms of nonprofit management, strategic and financial planning, a budget can at times be the most important document for nonprofits, apart from grant letters.
A good budget lets a nonprofit manage its goals and expectations for a defined period of time, usually a year. Not just after receiving funding, but before receiving funding, an honestly drawn budget can help nonprofits anticipate the most likely funding avenues and a responsible plan for spending.
While many view budgeting as only necessary to cut down on spending, budgeting is much more than this. It can be a powerful tool to prevent unnecessary spending and help put the nonprofit in a better financial position overall.
But it is absolutely important to be honest and realistic while budgeting. Being too tight on expenses can cause unnecessary strain on the budget, while being overly optimistic as to income projections is a recipe for disaster. How exactly should nonprofits approach budgeting? Let’s consider where to start.
Where to start in building a nonprofit budget?
Building a nonprofit budget starts with clarifying what the organization intends to achieve over the course of the year or the defined period. Then figures can be put to these ideas to create a broad financial roadmap for the period. Here are some steps to take:
● Identify the programs that will fulfil mission: Your organization likely has a mission it would like to fulfil for the year or over a longer period. Identify the programs that will help your organization fulfil this mission, along with their top-level plans.
● Identify desired impact: Identify how impactful you expect these programs to be over the period. For instance, if you’re planning a youth development program, how many young people do you intend to support for the program? Having a clear idea of your intended impact will help clarify considerations of how big or small the program is expected to be.
● Identify necessary expenses: Finally, create a schedule of expenses that will be necessary to achieve the level of impact you are looking for. You want to avoid letting questions of how much funding you may or may not get color your planning here. Attempt to achieve an honest projection of the likely expenses or what you are prepared to spend in any event.
With this preliminary work done, your organization will be in a much better position to create a budget that is reflective of the actual work you want to do during the year.
Tips for a functional nonprofit budget
The goal of budgeting is to ensure your nonprofit is well-placed financially over the course of your projected period, in terms of creating a balance between expenses and income. To ensure your budget is fulfilling this function properly and providing a platform for strategic planning, consider putting these tips to work:
● Incorporate fixed costs first: Fixed expenses are financial outlays that rarely change from month to month. Examples of these expenses include office rent, utility bills, and employee paychecks. Since these expenses are the most predictable, they should be accounted for first. Another reason for this is fixed costs typically take up a major part of nonprofit operational expenses. So, failing to include these right from the start may be risky.
● Variable costs should follow next: Variable costs include fundraising expenses, marketing costs and expenses related to events. Although these expenses will not be budgeted first, this doesn’t mean they are unimportant. However, due to the fact they fluctuate with need, there may be more flexibility with these costs.
● Break up expenses by direct and indirect expenses: It makes sense to break up expenses by direct and indirect expenses as most grants restrict funds to cover direct program expenses. Salary costs are an example of indirect expense, while program-related expenses are more direct. Breaking up expenses in this manner lets your organization know how much unrestricted funding will be required for operating expenses. This should ideally come after there’s a good idea of what grants will be available during the year.
● Break up by program: It also makes sense to break up your budget by program in order to quickly and accurately tell what programs are running within budget, and which are not. Merely looking at the organization-wide budget will likely produce an incomplete story and will not quickly show which programs are over-budget. With the clearer information available, you can make faster decisions on what programs are constantly over-budget and failing to drive impact. Then you can decide whether to tweak or discontinue.
● Conduct a monthly analysis of actual v budgeted expenses: Budgeting is an ongoing activity – it’s not one and done. Your accounting team needs to conduct periodic reviews of your budget to compare and analyze the differences between your actual and budgeted financial position. Where there is a variance in the figures, this will be quickly evident and you can get to work on identifying the reason for the variance before it is too late.
Organize your nonprofit finances with PreciseGrants
Although it is trite that budgeting is important for nonprofits, this takes nothing away from the monotony of the task. In addition, conducting top level analysis of budgets can be a difficult endeavor on spreadsheets. Nonprofits can make the process much easier by leveraging on technology such as PreciseGrants.
Using PreciseGrants, you can more easily plug actual expenses and your projected budget and account for the variance. Contact us to learn more about how we make nonprofit budgeting easier.