Whether large or small, it is in the best interest of all nonprofits to develop a budget. A budget is a financial plan. A budget is an approved plan for raising funds and spending that provides the financial support to achieve the organization’s annual goals. It is important to itemize how much money is needed to accomplish goal oriented tasks and from where this money will come.
In addition to itemizing the amount of money needed to achieve your goals and defining the sources for this money, budgets serve many other purposes. For example, budgets allow a nonprofit to:
- Spend money cost-effectively,
- Provide a well-thought out plan to a funder on how their money will be spent,
- Measure and guide the organization’s long-term financial health,
- Anticipate expenses and allocate money to pay for them, and
- Control spending.
However, budgeting is a dynamic process and is not set in stone. As your organization’s needs change, your budget can be adjusted, with the proper foresight, planning, and justification.
Creating a budget may seem daunting to someone who does not have a financial background. However, it does not take an accountant to establish a budget. The budget development process is an all-inclusive process involving key staff such as the executive director, program managers, and account, to work along with board members such as the finance committee and board chair.
Allow enough time to prepare the budget to ensure a thorough discussion and time for researching costs of new initiatives. Determine when the budget needs to be passed and count backwards to allow enough time to draft, review, and approve the budget. This step-by-step guide below outlines the thought process for creating a budget.
Step 1: Strategic and Resource Planning
During strategic planning, evaluate your group’s mission. Determine your organization’s goals and objectives, and allocate resources to accomplish them. Write action plans to determine how you will achieve the goals outlined in your strategic plan.
Step 2: Estimate Revenues
Revenue is money your organization generates from programs, services, or grants. Estimate revenue by examining records from previous years. If it is the first year your organization is working with a budget, find organizations that do similar work and offer similar programs and services. Use them as a benchmark to estimate revenue for your group. Decide if a source of revenue will be short-term, or something your group can count on as an ongoing source. Be as realistic as possible with estimates, taking into account factors that may affect your revenue, such as competition and staff availability.
Step 3: Estimate Expenses
Try to predict the amount of money your organization will need to operate in the coming year. Consider staff salaries, utilities, rent, office supplies, printing, travel, marketing, and programs when totaling costs. Again, future cost estimates can be based on past needs. Throughout the process, identify areas where it is possible to reduce costs.
Step 4: Calculate and Evaluate the Fund Balance
Calculate a fund balance by subtracting expenses from revenue. A positive result is ideal to ensure your organization will have enough money to weather uncertainty, or to experiment with new programs.
Step 5: Establish a Budget Calendar
Budgeting is a team effort. Maintaining a calendar serves as a guide for how everyone can work together. Use the calendar to establish specific due dates, timelines, and responsibilities. For example, responsibilities of board members include reviewing your group’s mission statement, establishing budget policies, and reviewing and approving the budget. Program managers need to supply relevant budget and planning information for their projects and provide cost assessments for program development.
Step 6: Board Approval
Once your proposed budget is finalized, present it to the board for approval.
Links to several sample budgets can be found on the Foundation Center’s website.
Use a six month surplus rule. Aim to have enough extra money to sustain your organization for six months during hard times. A six month time period is a general rule. If your organization has too little surplus, it will be harder to navigate through rough times. However, if it maintains too much of a surplus, granters may be skeptical as to why you need grant funds.
The Alliance for Nonprofit Management. Lists articles and Frequently Asked Questions (FAQ) on financial management.
The Management Assistance Program for Nonprofits. Offers a free management library with information on nonprofit finances.
Nonprofit Genie. Offers answers to frequently asked questions regarding nonprofit finances and accounting.
- The Budget Building Book for Nonprofits: A Step-by-Step Guide for Managers and Boards, by Murray Dropkin and Bill LaTouche. A guide on resources needed to develop a budget, including To-do lists, sample forms, worksheets, schedules, sample budgets, policies, and procedures. Jossey-Bass Inc., 1998.
- Not-for-Profit Accounting Made Easy, by Warren Ruppel. Provides a practical, easy to understand explanation of the financial accounting and reporting standards of not-for-profit organizations. The book focuses on not-for-profit basics for those who lack a background in accounting principles and financial reporting. Wiley, John & Sons, Incorporated, March 2002.
- River Network‘s River Voices publication on budgets. Volume 14, Number 4, 2005.