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:
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!
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:
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.
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:
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!
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:
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.
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.