For nonprofits like yours, effective financial planning is essential to furthering your mission. Not only does it allow you to fund your various programs while still being able to pay the bills, but it also sets your organization up for long-term growth and sustainability.

The most important financial planning tool at your nonprofit’s disposal is your annual operating budget. This document details all of the expenses your organization expects to incur in a given year, as well as all of the revenue you plan to generate to cover those costs.

In this guide, we’ll walk through three key tips to help you streamline the nonprofit budgeting process, including how to:

1. Keep Detailed Financial Records
2. Diversify Your Revenue Streams
3. Categorize Expenses by Function

Keep in mind that the most effective plans—including budgets—start with concrete goals. Before you create your operating budget, get your team together to set goals for the amount of funding your organization absolutely needs to bring in throughout the year and how much you hope to raise to provide additional flexibility. Let’s get started!

1. Keep Detailed Financial Records

In order to set attainable goals and create a realistic, accurate budget, you’ll need to utilize the financial information your nonprofit already has on hand. Keep a thorough record of your organization’s finances throughout the year so that when it comes time to start budgeting, you’ll have actual numbers to reference as you make predictions for next year.

Look over the following resources as you develop your budget:

• Chart of accounts. This is the master list that shows where all of your organization’s transactions and financial data are tracked. It includes information on your assets, liabilities, net assets, and—most importantly for budgeting—income and expenses.
• Financial statements. The statements of activities and functional expenses are especially useful for budgeting, since they provide actual numbers for the previous year’s revenue and expenses that you can use to make projections for the coming year. Then, your monthly cash flow statements can help you stay on track with spending and fundraising throughout the year if you compare them to your budget.
• Accounting software reports. If you need more detailed information on any of your nonprofit’s individual transactions, pull reports from the accounting platform you use to log expenditures and funds raised day to day.

All of this financial data may seem overwhelming at first glance, but good accounting systems will allow you to configure reports and set up your chart of accounts in the way that will be most beneficial for your organization. If you still need help with analysis or have more specific questions, consider reaching out to a financial professional like an accountant or fractional CFO who specializes in working with nonprofits.

2. Diversify Your Revenue Streams

There are a wide variety of ways your organization can bring in funding. Although many nonprofits focus heavily on one or two revenue streams, including multiple sources in your funding model provides additional financial stability for your organization.

As you develop the revenue side of your nonprofit’s budget, break down your projected funding based on its source. Your categories may include:

• Individual donations. These contributions typically make up the bulk of a nonprofit’s funding. They include small, mid-level, and major monetary gifts, as well as in-kind donations and event revenue.
• Corporate philanthropy. This category encompasses direct contributions to your nonprofit from businesses. Popular examples of corporate philanthropy include matching gifts, volunteer grants, and sponsorships.
• Earned income. This type of revenue often isn’t associated with nonprofits, although there are several legal ways your organization can earn income. For example, you might sell branded merchandise or start a membership program and collect dues.
• Investments. Earning interest on investments also isn’t the most popular nonprofit revenue stream. However, your organization can open a brokerage account just like an individual or for-profit business could. Nonprofits are also allowed to invest in stocks, bonds, and even cryptocurrency. If you participate in any of these activities, they should be reflected in your budget.
• Grants. Many organizations provide grant funding to nonprofits, including the government, the philanthropic arms of large corporations, and private and public foundations. To secure a grant, you’ll typically need to write a standout proposal that demonstrates to the grantmaker why your organization deserves the funding.

Remember that a budget is just a projection. Including several of these funding sources in your nonprofit’s budget can help you prepare for a variety of future uncertainties. If you don’t win a grant you thought you would or economic turbulence leads your corporate partners to give less, having other revenue streams will help you make up that lost funding more effectively. On the other hand, if your major gift solicitations prove especially effective and your investments have better returns than expected, you’ll have more financial flexibility going into next year!

3. Categorize Expenses by Function

There are two main ways to break down the expense side of your budget. You can either use natural expense categories, which organize projected costs according to the nature of the payment you’ll make. Or, you can list your expenses based on how they’ll further your mission using functional expense categories.

Most nonprofits go the second route and organize their budgets using the following categories of functional expenses:

• Program costs. This category includes all spending that is directly related to furthering your organization’s mission, so the exact types of expenses will vary from nonprofit to nonprofit. For example, an organization that provides free after-school music lessons for underserved teens would include the cost of instruments and sheet music under their program expenses.
• Administrative costs. These expenses help keep your nonprofit running day to day. They include things like rent, utilities, office equipment, and staff salaries.
• Fundraising costs. These include all of the upfront costs associated with bringing in revenue for your organization. Expenses related to event planning, marketing, and fundraising software purchases fall into this category.

There are two main reasons why nonprofits like yours tend to budget based on functional expenses. First, it helps your organization put its mission first in its financial management strategy. Second, you’re required to report your functional expenses on your nonprofit’s annual tax return, and it’s helpful to maintain consistency across all of your financial documents.

While the tips above will help you create your nonprofit’s operating budget from scratch once per year, budgeting shouldn’t be a one-and-done event. Check in with your budget on a monthly basis to ensure your spending and fundraising are on track, and make adjustments to your strategy as needed so you can pull accurate reports at the end of the year.

About the Author

Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not for profit organizations.