How To Create A Budget For A Nonprofit: Explained
Managing a budget well is a crucial part of the nonprofit accounting basics, and for the health of your organization's finances. There are different approaches to drafting, executing, and managing a budget. It is an essential tool that will help your nonprofit plan ahead and make good decisions.
In this article, we’ll talk about:
Let's jump right in!
What is the Purpose of a Budget?
The budget is also called a "business plan" because it helps you make informed decisions about expenses, fundraising, hiring, projects, and how to prioritize your time throughout the year. It is an annual statement of all operational expenses and income.
A budget lays out all expenses and income for the fiscal year. This budget is an estimation before the year begins, but you should carefully research all expenses and expected income, so that the estimations are as close as possible to the actual numbers.
The budget is crucial for nonprofits because it is:
A useful forecasting tool. Do you need to fundraise more to cover new expenses this year? What expenses are necessary for the organization to grow? Are your standards up to date?
A guide for your organization. Throughout the fiscal year, you would need to consult it constantly to ask: Does the actual budget match what was planned? If not, how can the situation be corrected? The budget acts as your map, if you need to change course at any point of the fiscal year due to unexpected expenses. Much like good software, an effective budget can be a time saver when it comes to making decisions on what to spend on. If it doesn't fit and isn't 100% necessary for your operations, it should be pushed to the next quarter or fiscal year.
Approved. The budget should be approved by most of your organization’s leadership. It reflects your nonprofit’s goals, values, and drives future actions, so it’s important for everyone to be on the same page for the budget.
Necessary when applying for grants and funding. Most foundations and funders will require a projected budget in their grant applications. A well-crafted projected budget is a sign of your ability to plan ahead and manage funds, which impacts whether they decide to select your nonprofit for a grant.
Steps for Creating a Budget
There are two approaches of creating a budget:
Model A: expected expenses first. You would calculate all expenses needed for your organization’s activities, and then create a plan to fundraise enough income to cover all expenses.
Model B: expected income first. First, see how much income is expected, then plan activities based on how much the organization can spend.
In both cases, a golden rule applies: The budget should be balanced. The amount of expenses should not exceed the amount of income. You wouldn’t want to end the year in the red!
Choosing the Best Model
You should choose the best model depending on the economic model of your nonprofit. This, in turn, depends on the kind of work your nonprofit does.
Example #1: You manage a nonprofit that supports children in Bolivia. Each year, you send a team to carry out specific missions: renovating schools, distributing school supplies, and setting up sports programs.
In this case, you would choose model A. It’s best to calculate all the expenses to accomplish the missions, and then create a plan to fundraise the total amount needed.
Example #2: You manage a basketball club that is growing in popularity. With your club's growing success, you plan to offer special summer workshops to complement your weekly schedule. The summer workshops would add 100 additional members (and membership fees!) next year.
For this situation, model B is better because the new expected income shapes your decisions. Once you can estimate expected income, you can create a plan that factors in necessary expenses to support the new workshops (e.g., hiring, advertising, and equipment).
Simon can plan ahead with
a budget that works best for his nonprofit
Calculating the Budget for Your Nonprofit
Once you have chosen whether to start with your expenses or income, you can list all the different categories of expenses and incomes. Make sure to prioritize the categories with the most costs!
The largest expenses would impact your budget the most, so it is crucial to have accurate numbers for them in your budget. Otherwise, there would be serious consequences if your budget numbers are too low or too high.
Common categories for income include:
Grants (from private foundations, government, or corporations)
Merchandise or ticket sales
Expenses for nonprofits usually include:
Payroll for staff
Fixed costs (office rent, electricity, internet, software subscriptions)
Variable costs (travel, office equipment)
Your first budget would need the most research and care. Once your organization has had a couple years under its belt, you can use past budgets as a template, because there is usually not too much departure from those numbers.
Let's take the example of the basketball club:
The summer workshop would welcome 100 new basketball enthusiasts. Last year, you saw that one staff member can manage 20 players at a time for $X. To manage the 100 players, you should hire 5 people. You’d need to expect that new staffing costs to be 5 * $X.
Once you have dealt accurately with these large expenses, you can tackle the smaller ones.
For strategic reasons, we suggest creating a budget that doesn’t depend on grants. If your nonprofit has a strong vision and mission, you can explore fundraising to lift your organization off the ground. It would be a more sustainable economic model to have multiple sources of income than to rely on grants, especially if the grants don’t end up coming in.
Sometimes, you need to create a budget for a specific project.
A foundation might call for grant applications that meet certain requirements, such as cultural or social justice projects for local communities. You would need to draw up a detailed budget to meet those grant requirements.
Let's take the example of the nonprofit supporting Bolivian children again.
The nonprofit wants to introduce computers to the Bolivian schools for the students to gain computer literacy. After some research, the nonprofit discovers a foundation that funds initiatives in technological education.
The nonprofit would need to create a specific budget for this project, leaving out more general operational costs that do not pertain to the grant application. Instead, this budget would focus on how much it would cost to purchase, ship, and install the computers.
Using the Budget to Guide Your Nonprofit
As we have said, the budget acts as a map for how your nonprofit is doing financially.
You should consult the budget regularly, to make sure you are on the right track. To analyze how the fiscal year is going, compare every quarter and the current year’s budget with the previous year.
It is important to identify and correct any discrepancies between the projected numbers in the budget and actual income and expenses during the year.
Bert is able to make decisions wisely
with a carefully-crafted budget
Cash Flow Plan
The cash flow plan is another part of your budget, which lays out a timeline for when to expect cash inflow and outflow.
It’s not enough to know that you’ll have a balanced budget at the end of the fiscal year. What if at some point during the year, your nonprofit’s bank account will be negative? A cash flow plan helps you to anticipate possible cash flow difficulties, so you can prepare solutions to remedy them.
If we take a look at the basketball club’s cash flow plan, we'd notice that for the summer workshop, promotion costs for flyers and advertisements would need to be paid at the beginning of April. However, the tuition would only be paid in May. For one month, the basketball club would have more expenses than income.
In the overall budget, it would look like everything is fine, because the income at the end of the year appears higher than total expenses.
This is where the cash flow plan is helpful to prevent risky financial situations. Cash flow is sometimes less of an issue for nonprofits than for-profit companies, because nonprofits often raise funds before spending the money.
Managing a nonprofit means looking at the budget carefully, so that all income and expenses are accounted for.
If you create your budget with care, you’ll have a serene and balanced year!