If you’ve recently established a new nonprofit, one of your top organizational priorities should be financial planning. Not only will you need to bring in enough revenue to fund your operations, but you’ll also have to allocate those funds effectively so you can further your nonprofit’s mission while still being able to pay the bills.
Your organization’s annual operating budget, an essential financial planning tool, will help you do just that. You’ve probably organized a personal budget before, where you laid out all of your expenses for the year—from utilities to groceries to entertainment—and calculated how much income you’ll need to bring in to cover those expenses. Nonprofit budgets work similarly, except they break down annual costs and expected revenue for your entire organization.
To help you get started, this guide will walk through the four basic steps of creating a budget for your nonprofit:
- Set Clear Financial Goals
- Categorize Revenue by Source
- Allocate Expenses by Function
- Check in With Your Budget Regularly
As you begin the budgeting process, make sure you have all of the resources you need. Set up an accounting software solution and a fundraising database for your nonprofit so you can collect and store all of the information you need to create your budget. Additionally, don’t hesitate to reach out to a nonprofit accountant if you need help or have questions along the way.
1. Set Clear Financial Goals
A successful financial plan starts with concrete goals. Before creating your nonprofit’s operating budget, set goals for:
- How much revenue you need your organization to generate throughout the year to cover expenses
- How much funding you’d ideally like to raise so you can start a savings account for your nonprofit
- What costs do you hope to cut throughout the year
According to NXUnite, the most effective nonprofit goals follow the SMART model, meaning they’re specific, measurable, attainable, relevant, and time-bound. Once you’ve considered each of the specific elements above, make sure your responses are reasonable for your nonprofit’s current situation and have a numerical value attached to them so you can measure your success. Your time frame for your budgeting goals should be the current fiscal year, and you should check in with your organization’s long-term strategic plan to determine relevance.
2. Categorize Revenue by Source
As you create your nonprofit’s fundraising strategy, make sure it includes multiple funding sources. Diversifying your organization’s revenue increases financial sustainability—by not being fully reliant on a single type of funding, you’ll be in a better position to recover if one revenue source falls through or your expenses are higher than expected. If everything goes according to plan, your nonprofit will have additional financial flexibility.
To support this strategy, it’s best to organize the revenue side of your organization’s budget by source. Include estimates of how much funding you plan to bring in from:
- Individual donations of all sizes and in all formats (online gifts, in-kind contributions, event revenue, etc.)
- Corporate giving initiatives such as matching gifts and financial sponsorships
- Earned income like branded merchandise sales or membership fees
- Grants provided by the government or foundations
One common myth about nonprofit budgeting is that because nonprofits by definition can’t turn a profit, their budgets have to break even every year. However, the term “nonprofit” simply means that you have to invest all of your funding back into the organization—not that the revenue you generate in a given year can’t outweigh your expenses!
While you may try to break even for the first few years of your organization’s existence, your long-term goal should be to budget for a revenue surplus. That way, once you’ve covered all of your expenses, you can put any leftover money into a savings or investment account to help your nonprofit prepare for future growth.
3. Allocate Expenses by Function
There are two main ways your nonprofit can categorize its expenses in its annual operating budget. You can either list your natural expenses according to the types of payments you’ll make or break down functional expenses according to the way each payment will further your organization’s mission. Most nonprofits choose the latter to maintain consistency across financial documents because they’re required to report functional expenses on their annual tax return.
If you choose to organize the expense side of your budget by function, you’ll use the following categories:
- Program costs. These expenditures are directly related to furthering your organization’s mission, so they vary for every nonprofit depending on its work. For example, an animal shelter would include the costs of pet food and veterinary care under their program expenses, while an organization dedicated to promoting children’s literacy would list the cost of acquiring books and producing learning materials under theirs.
- Administrative costs. These expenses keep your nonprofit operating day to day. They include rent, utilities, office equipment, and staff salaries, among other things.
- Fundraising costs. This category encompasses the upfront spending required for your nonprofit’s revenue generation activities. Expenses related to event planning, marketing, and investing in specialized fundraising software fall into this category.
You may also have heard of the term “overhead expenses,” which refers to your organization’s administrative and fundraising costs combined. While overhead is often thought of as something that takes away from funding your nonprofit’s mission, it isn’t inherently bad—in fact, it’s essential for your organization to survive.
A common industry recommendation for expense allocation is the 65/35 rule, which states that nonprofits should spend at least 65% of their revenue on programming and no more than 35% on overhead. In reality, this breakdown will look different for every organization. As you create your budget, treat this “rule” as more of a guideline to find ways to reduce overhead spending where possible and put more funding toward your nonprofit’s programs.
4. Check in With Your Budget Regularly
You’ll create your operating budget from scratch once each year, getting input from staff members across your nonprofit throughout the process before submitting the budget to your board for approval. However, successful budgeting isn’t a one-and-done event.
Instead, Jitasa’s nonprofit budgeting guide recommends scheduling quick budget check-ins at least once a month and performing a more in-depth review each quarter. These meetings allow your team to keep track of your spending and fundraising throughout the year to resolve any discrepancies in your finances.
The nonprofit budgeting process can take some time, so make sure to start early. Begin setting goals at least six months in advance, and add a discussion about creating your next budget to the agenda for your second-quarter review of your current budget. This way, you’ll have plenty of time to review your financial data, make revenue projections, effectively allocate your expenses, and send the budget to your board before the new fiscal year starts.