Budgeting Best Practices for Nonprofits
Creating and managing a nonprofit budget is about more than just numbers. It’s about aligning resources with mission, making informed decisions, and staying flexible as circumstances change. Here are five best practices to guide an organization’s budgeting process.
1. Start with a Solid Budget Template
Use a budget template that outlines the organization’s main revenue sources, whether they are grants, contributions, association dues, or a combination of those. The template should also include basic expense line items, such as personnel costs (salaries, benefits), office expenses (rent, utilities, copying, supplies), and travel expenses (airfare, hotel, meals). The expense groupings and individual categories will vary based on the specific organization’s operations. A good template helps create consistency and clarity year over year.
2. Budgets Don’t Have to Break Even
The budget does not always have to break even. The budget should be made based on the best information the organization has at the time and tell a story about the financial strategy. That means if the organization has a large grant, or a significant contribution that is expected, which will exceed the anticipated expense activity for the year, they should show a surplus budget. Conversely, if the organization has a year in which they are providing more services and expending more expenses than the expected influx of revenue, they should show a deficit budget.
3. Understand Fixed Versus Variable Costs
One of the most important things to understand about the organization’s expenses is which ones are fixed (cannot adjust easily) and which ones are variable (can be adjusted if needed). This distinction becomes especially important when responding to financial uncertainty. In good years, the organization might need to expand or extend the use of the variable costs and in tight years those variable costs might need to be reduced.
4. Consider Budget Time Frame(s)
The basic time frame for a budget is annually. However, don’t be afraid to re-engineer the budget if major events occur that cause a change either to the organization’s benefit or detriment. If one waits until year end, they might miss an opportunity to do more for the mission or mitigate the impact of a previously unknown reduction of revenue or unexpected expense. Likewise, if the organization experiences fluctuations in expenses or revenues during the year, consider budgeting by month.
5. Tie the Budget to the Mission
The budget should directly support the mission, and it should be a tool to accomplish the strategic goals of the organization. Make sure the budget aligns with the organizational programmatic priorities. Stay true to the organization’s core. This seems intuitive but is often overlooked or missed.
Final Considerations
A few key principles to keep in mind throughout the budget process are:
- Be realistic. Don’t over estimate revenue or underestimate expenses.
- Be flexible. Don’t be afraid to change the budget if circumstances change during the year.
- Be inclusive. Make sure the employees that are responsible for adhering to the budget are part of creating the budget.
- Be mission-focused. This is the ultimate purpose, so make sure the budget speaks to that.
- Be transparent. The budget should not be a tool just for the finance or accounting departments. Make sure the program staff know what the budget is and where they stand as the year goes on.
- Be resourceful. Use industry-specific best practices and the information provided above to help in the budgeting process.
- Have resilience. Uncertain times have a huge impact on a nonprofit and its budget; navigating those uncertainties can determine the impact an organization can have while living out their mission. Tips for financial resilience can be found here.
Please contact us if you have questions about the information outlined above; our seasoned and experienced nonprofit professionals are here to help. You can also learn more about our nonprofit services by visiting our Nonprofit industry page.
