Practical Tips for Nonprofit Budgeting

Tips to help ensure your nonprofit’s long-term financial sustainability.

Being the financial type, I am fond of saying that “the numbers tell a story.” And the story of what your organization plans to do in the coming fiscal year is called the budget.

Every year, organizations like yours go through the process of creating a budget to be approved by your board of directors. This is a good thing. And budgets done well are meaningful to everyone involved in the organization.

Each one of the ideas touched upon in this overview of practical budgeting ideas could be its own chapter in a book. I aimed to keep the lists short to a few of my favorites or to answer frequently asked questions. So, this is just a taste to whet your budgeting appetite.

Your budget tells a story.

Budgets are about financial responsibility. They are a planning tool, a means of communication, and a guide for decision-making — stated in financial terms.

Budgets are about the future that the people in the organization want to create. Budgets tell the reader where an organization expects to get its financial resources to pay for all of the expenses identified for the coming fiscal year.

For this reason, budgets help people in the organization to understand how the flow of money into and out of the organization relates to the organization’s activities. And, budgets help everyone in the organization understand that every decision made affects the organization’s financials.

Budgets serve as a guide, not an absolute. The day after your budget has been approved, things will happen, for good or ill, that you hadn’t planned. Yet, once made and approved, budgets are rarely changed.

Why?

Because budgets are supposed to also measure what actually happened against what was originally planned. They are intended not only as a planning tool going forward, but as an evaluative tool looking back.

By comparing what actually happened to and with the money against the original plan, the people responsible for the following year’s budget are in a position to make wiser decisions.

The budgeting cycle.

Budgets are typically an annual activity. At a very high level, I view the budget cycle in three main parts:

Getting started
Creating the budget
Monitoring actuals against the budget

Getting started.

A clear budgeting process will lead to a better budget.

A. Provide a clear timeline so that everyone can make the time to be a part of the budget process:

Define the expectations of deliverables for all those involved.
Provide supporting information such as:
- The prior year’s actual numbers versus the budget numbers
- The organization’s mission, goals, and strategies
Identify the person in charge of the budget creation (typically the Director of Finance/CFO).
Identify the board member liaison.

B. Create a high-level budget calendar:

Three months before the start of the next fiscal year: Lay out the budget assumptions.
Two months before: Develop the money-in and money-out details.
One month before: Review, apply finishing touches, and seek approval.
First month of the fiscal year: Implement the budget.
Subsequent months: Monitor the financial results and react accordingly.

C. Develop a written set of “budget assumptions” — the information and thinking used to develop the numbers.

Budget assumptions are not a restatement of your organization’s mission, vision, and goals. Rather, with these ideas setting the context, budget assumptions are a statement of what you must take into consideration to actually carry out your plans for the coming year.

These assumptions articulate the thinking behind every number in the budget:

What you are going to do to achieve the goals
What possible issues, obstacles, or constraints you’ll need to deal with
What’s happening outside the organization that could impact your plans

D. Involve the organization — from managers all the way up to the board of directors.

Getting information about the coming year from others in your organization is critical to building a budget whose numbers reflect what’s supposed to happen.

Effective budgets are not solely the responsibility of your finance and accounting team. It’s particularly important to directly involve those who are tasked with carrying out the work. This involvement can result in a feeling of ownership of the budget numbers, which in turn generates buy-in to the budget and the budget process.

Creating the budget.

When you sit down to create the budget, that’s when the number crunching begins. All of the conversations about what’s supposed to happen, what will or won’t be done, and the why and the how of the actual work will become a number.

The finance folks come in real handy at this point, as they are typically tasked with helping translate the strategies and tactics for what the non-finance people want to do into financial terms.

A. Budget tool.

Use a budget spreadsheet or budgeting app that identifies each of the areas that make up your budget. Here are some tips for making use of that tool:

Base budget line items using the G/L account codes in your accounting system.
Use a similar template for each area.
List revenues and expenses by month.
Roll up all of the budget areas to a detailed summary page.
Roll up those detailed summary pages to a single high-level summary.

B. Money-in (revenue, income).

Money-in is a good thing, and deserves special attention:

Identify how, from whom, and when your organization is getting the money.
Be conservative in your revenue estimates. It’s much easier to add more expenses if the money comes in than to cut expenses should the expected funding not materialize.
Total revenue will serve as a financial lid on the amount of spending that can happen.
Donations with restrictions:
- Include restricted funding that is to be released from restrictions to cover the budgeted year’s operating expense.
- Identify the new sources of restricted funding as this is the “pipeline of future funding,” but this money is not part of the operating budget until the funds are released from restriction.

C. Money-out (operating expenses, capital expenditures).

Spending is what’s needed to get the work done! The spending needs to be focused and aligned with the organization’s budget assumptions.

Start with people and related costs (such as payroll taxes and benefits), as these often constitute 70% to 90% of an organization’s budget.
Collect from all those involved in the budget process information on specific spending needed to achieve their goals. Some of the typical “direct costs” that need to be identified are contractors, sub-awards, travel, meetings, and specific purchases of supplies and equipment.
Make sure to have enough administrative support built into your budget. Accounting, HR, and IT are not always budgeted to meet the requirements of the future organization. In general, I find that nonprofits under-resource their accounting areas.
Include depreciation expense.
When it’s reasonable to do so, don’t just divide your budget numbers by 12, though this can be a convenient last-ditch effort to creating the monthly numbers.
Create separate budgets for capital expenses (for example, facilities improvements, really expensive equipment). Include where the money is coming from to pay for the expenditures (that is, from grants or from loans) and the planned spending that will end up on your statement of financial position (aka, the balance sheet), not any spending that will end up instead directly on your statement of activities (aka, the income statement or P&L).

Setting up and monitoring the budget.

Now that your beautiful budget has been approved, you’re just about ready to use it to measure how the organization is faring financially throughout the coming fiscal year. Comparing actual to planned numbers is known as budget reporting, and such reporting tells the story of why the numbers ended up where they are, rather than just restating the numbers in words.

Here are some of the things that happen next:

Enter the budget into your accounting system for consistency and ease of running actual versus budget reports:
- Enter information by month.
- Create stand-alone budgets as needed for grants or government funding, so as to monitor the “spend-down” of these funds.
As one of the last steps in your monthly close process to monitor how things are going, financially speaking, run a set of financial reports:
- Take a look at the results against budget for the current month under report and the year to date, and also have the total annual budget in view to see where things stand compared to the planned end point.
- Evaluate whether you are on budget with revenue and expenses.
- Evaluate whether you are not meeting expectations in any one area or another.
Have regular monthly meetings to analyze and report out how things are going.
When the financial results are not meeting expectations, take immediate corrective actions. Very few things will stop an organization faster than running out of money.
If more money is coming in than expected, remain vigilant and stay focused on your financial management. More revenue than expected can mask issues or concerns about how the organization is actually being managed.

Even with these relatively few bullet points, I hope you can see that budgets and the budgeting process are a critical and strategic part of running your organization.

With the understanding of how the budget was built, you can better read the story that the actual numbers are telling you. And this helps you to communicate to the board and staff about how things are going.

Building in the budgeting discipline is essential to understanding the financial well-being of your organization. And this discipline will help ensure the long-term financial sustainability that will keep your organization financially healthy.

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About the Author

Monte S. Meyers, MBA

Monte S. Meyers, MBA, founded Shining Star Consulting, LLC in 2006. His firm has helped many dozens of nonprofit organizations improve their financial systems and processes, pass audits, create effective budgets, develop clear policies and procedures, create useful financial reports, and develop insightful financial analysis. He has over 25 years of experience working with nonprofits in the fields of accounting, budgets, financial systems and processes, and financial reporting. He serves on the board of directors for two nonprofit organizations. For fun, he loves backpacking in Yosemite and singing the tenor part in the UC Alumni Chorus.

One thought on “Practical Tips for Nonprofit Budgeting”

C. Bingham says:

February 8, 2022 at 5:51 pm

Thanks for this timely article. I am responsible for creatin a budget for the organization that i serve. I do not have a background in accounting, but I happily took on the task as no one else wanted to dive in. The information provided in this article is what I need to get started on our budget planning.

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