How to break down the budgeting process at your nonprofit
Published: January 2017 | Last reviewed: July 2018
After the mission and vision, a budget is one of the most critical guiding documents for a nonprofit. Think of the budget as the plan for your nonprofit's future — a future that's fiscally healthy, strong and sustainable.
And remember: a budget forms a crucial part of your overall strategy, and the means by which you will achieve it. It’s core business, not a separate area of responsibility for the finance department.
Although budget planning is often called "forecasting," you're not reading your nonprofit's future in tea leaves. Rather, you're using what you know to date to develop a realistic picture of the future. Demystify the process with these seven essential steps.
Determine the budget period
Most nonprofits set an annual budget. This budget year, or fiscal year, doesn't typically follow the calendar year. You might choose an alternate time frame depending at least in part on your programs (sometimes known as a program year), with the fiscal year ending just before an expected lull in program activity. Or, if your organization has a primary funder — such as a corporate or family foundation — you might choose to synchronize your fiscal year with theirs.
Prepare a clear plan for the year ahead
Create a clear plan of what the organization plans to do in the year ahead, including all activities, projects and events. The expenditure expected to deliver these and the income you receive to support this will form the basis of your budget, and will determine whether you will have sufficient funds to do what you planned.
Include key stakeholders
A solid, likely-to-be-approved budget is one that's realistic and constructed with the input of key stakeholders throughout the organization. Budgeting as a team results in a more comprehensive view of your organization's work. It also supports buy-in and collaboration, giving staff a sense of ownership in your nonprofit's financial success. Share your budget with your committees or board of trustees to gain input and approval.
Think ahead for the next year
An annual budget won't necessarily be the same from one year to the next. Propel Nonprofits recommends beginning the budget process at least three months before the end of the fiscal year to give the board adequate time to approve the budget before the year ends. To keep the review process on track, circulate a budget timeline — including key dates for review of draft budgets and submission of the final version.
Synchronize budget and accounting line items
Your financial statement or chart of accounts should provide the line items for your budget — for example the type of income you receive or the type of expenditure you incur. Not only does this simplify the budgeting process, it makes the budget easier to adapt — and learn from — in the long term. Using the same categories of income and expenses in both documents (for example, ‘training costs’) allows you to monitor the accuracy of your budget estimates and adjust as needed. Using different terms or line items might result in unnecessary confusion.
Include a cash flow forecast
Your budget gives an overview of money coming in and going out, but a cash flow forecast shows when this will happen in reality — and acknowledges that your income isn't necessarily steady throughout the year.
For example, funds in the form of grants and donations may arrive all at once or with restrictions — while expenses such as payroll, rent and insurance are quite steady. A forecast identifies when you'll receive this type of income and how you'll cover regular, predictable expenses, as well as indirect and miscellaneous costs. Being clear on when money is coming into your organization and when it will need to be spent is a very important part of managing your finances and ensures you can deliver your activities.
Set aside an operating reserve
An operating reserve, which may also be labeled as "contingency" or "miscellaneous," should provide enough cushion to cover events such as the unexpected replacement or repair of critical equipment. An established or small nonprofit might estimate about 5 percent of the total budget for an operating reserve; established nonprofits who have employees tend to put aside reserves to cover for example six months of operating costs if they run into difficulty. But there's no single level or even range of reserve that's necessarily appropriate for all organizations. If your nonprofit is new or you have unpredictable funding sources, inch the percentage higher. If you don't need your operating reserve in a given year, great. Simply roll it over into the next year.
Don't go it alone
If the budgeting process seems overwhelming, take advantage of a wealth of (free!) online resources. Consider this 10-step budgeting checklist from the Propel Nonprofits and this program-based budget builder from the Wallace Foundation.
This article draws on the expertise of Nishka Smith, a chartered management accountant and founder of the London-based Visual Finance Ltd., which supports charities to strengthen their financial management and planning capabilities.