Nonprofit Budget Basics: The Key to Financial Health

Your nonprofit budget is the heart and soul of your organization and can serve as a guiding light for financial health.

What Is A Nonprofit Budget?

A budget represents what your nonprofit expects to spend (expenses) and earn (revenue) over a specified time period. Budgets are useful for projecting how much money you will need for a major initiative, for example, buying a facility, hiring a new employee, etc.

Budgets also help track whether you are on target or not. Example budgets include: yearly (annual or operating) budgets, cash budgets, capital budgets (for major assets, such as equipment, buildings, etc.) and proposal budgets (for fundraising). Similar to the breakdown of the chart of accounts into functional areas and programs, a nonprofit budget must also be broken down by the same areas.

In simple terms, your budget is a financial plan for the year. It quantifies your annual strategy and used to communicate with your organization’s board, staff and funding sources.

Nonprofit Management Tool

Management tool measures progress towards goals:

• Monthly review of revenue and expenses
• Creates accountability by department and for the organization as a whole
• Separate program budgets from special budgets for capital projects or fundraising events
• Budget must be created from the bottom up to reflect each program’s individual fiscal requirements

Creating Your Budget

Before you get started, you need to have a strategic plan. This is the basis for ensuring your budget aligns with your plan. To get started, you can use financial reports to provide you with data that can guide you through the budget creation process.

• Review current and prior year actual income and expenses
• Budget must be split by program and department
• Review grants
• Review with program directors
• Factor in new salary positions, cost of living increases (salaries), increases in overhead, additional program needs
• Budgets should be balanced – Revenue and expenses are equal
• Budget must be entered on a month to month basis to account for variables for time of year
• Determine if your budget incorporates an allocation of indirect costs to programs
• Must be approved by treasurer, finance committee, grantors and board of directors

Nonprofit Budget Types

In December, 2017, the Financial Accounting Standards Board (FASB) issued changes for simplifying classification of nonprofit net assets. While the nonprofit budget is not subject to these standards, it will be easier if these changes are implemented to remain consistent moving forward. To summarize, contributed revenue, such as donations, contributions and grants, are simply classified as contributed revenue with or without restrictions.

• Net Zero Budget: Revenue = Expenses – Necessary for Grants. Spend it or lose it.
• Net Operating Loss Budget: Expenses exceed Revenue: Loss is covered by prior year net asset carryover, or unrestricted revenue.
• Net Surplus Budget: Revenue exceeds Expenses. Surplus must come from unrestricted revenue or grants.

Budget Tips

• Utilize budget reports to measure actual revenue and expenses against the planned budget
• Helps in determining how well you are tracking your plans
• Helps in preparing future budgets
• Do not constantly change budgets because of variances. Renders the budget useless
• Modify budgets only when there are major changes such as new programs, sites

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