4 Key Considerations for Developing a Nonprofit Budget
As a nonprofit professional, your top priority is furthering your organization’s mission. It’s why your nonprofit exists, and likely what motivates you to work hard every day to improve your community.
Effectively managing your nonprofit’s finances allows you to fund that mission, and one of the most important accounting documents to leverage is your budget. Budgeting helps your nonprofit allocate resources by breaking down your revenue and expenses in an organized way.
To help you get started with developing a budget for your organization, here are four considerations to keep in mind:
Understanding the Types of Nonprofit Budgets
Categorizing Revenue by Source
Allocating Different Categories of Expenses
Taking Restricted Funds Into Account
Your nonprofit budget can also help increase transparency with donors and other stakeholders. Having a resource that shows how all of your finances are distributed instills a greater sense of trust and confidence in everyone involved with your organization, making supporters more likely to stay engaged with your mission long-term. Let’s get started!
Understanding the Types of Nonprofit Budgets
When most organizations discuss their budget, they first think about the master financial plan that they create once each fiscal year. While this document guides a wide range of your nonprofit’s day-to-day activities, there are actually several different budgets that you might leverage depending on your needs and goals.
Jitasa’s guide to nonprofit budgeting outlines the four main types of budgets as follows:
Operating budget. This is the annual budget mentioned above that breaks down the projected revenue and expenses for your entire organization.
Capital budget. If your nonprofit is planning a multi-year project like a capital campaign, you’ll use a capital budget to project the project’s various costs and the funds you’ll raise to cover them.
Program budget. This type of budget outlines the revenue and expenses associated with specific programs or initiatives that your nonprofit launches. It includes both the one-time costs of starting the program and the recurring expenses that you’ll incorporate into your operating budget to maintain it.
Grant proposal budget. Many grantmaking organizations ask the nonprofits that apply for their grants to submit a budget detailing how they would use the funding as part of the application process.
Each of these budget types serves a different purpose and covers a different time frame, but they have two characteristics in common. The first is that they’re most effective when treated as living documents—although you’ll create them from scratch once, checking back in with them periodically helps keep your nonprofit financial management activities on track. The second is that they all categorize some aspect of your revenue and expenses.
Organizing Revenue by Source
Especially when creating an annual operating budget, many nonprofits find it helpful to categorize their revenue by source. This is because these organizations tend to receive funding from a wide range of sources, such as:
Individual donations. These contributions tend to make up the bulk of nonprofit funding and include every method by which a donor could contribute to your organization, from online donations to event revenue to major gifts.
Corporate philanthropy. Businesses of all sizes are often willing to support nonprofits through event sponsorships, employee matching gifts, volunteer grant programs, and other corporate giving initiatives.
Earned income. If your nonprofit sells branded merchandise, offers paid memberships, or rents out physical space to other organizations, the revenue generated from those activities counts as earned income.
Grants. Many different types of organizations can provide grants, including government entities, corporations, and both public and private foundations. In most cases, your nonprofit will need to submit a detailed application that follows the funder’s guidelines to have a chance at securing grant funding.
Investments. Infinite Giving’s guide to nonprofit investing explains that nonprofits can open brokerage accounts and invest in stocks and treasury bonds just like individuals can, although few organizations actually take advantage of these opportunities.
All of these revenue sources are fair game for registered 501(c)(3) organizations like yours to incorporate into your annual budget, as long as they’re reported on accurately and all of the funding you bring in is invested back into your nonprofit to further its mission. Include projected numbers for each category, but keep in mind that these are just estimates, and you may need to adjust your projections throughout the year.
Allocating Different Categories of Expenses
Once you’ve predicted your revenue for the year, you can start allocating it toward the various expenses in your budget. The costs your nonprofit may incur tend to fall into three categories:
Administrative expenses. These are the costs of keeping your nonprofit operating from day to day, such as rent, utilities, insurance, office equipment, and staff member compensation.
Fundraising expenses. Anything you spend on the fundraising initiatives you launch falls into this category, including event planning, marketing, and fundraising technology costs. Fundraising and administrative costs together make up your nonprofit’s overhead.
Program expenses. These costs are directly related to the activities your nonprofit conducts to further its mission, which can vary widely. For example, an organization that provides after-school tutoring would count the cost of books and supplies for participating students toward their program expenses, while an animal shelter might include cat litter and pet food in theirs.
You might have heard of the 65/35 “rule” of budgeting, which recommends that nonprofits spend about 65% of their funding on programs and 35% on overhead. However, this breakdown will look different for every organization and may change from year to year as your nonprofit launches initiatives and encounters new situations.
Another common misconception about nonprofit operating budgets is that they have to break even every year because nonprofits by definition can’t turn a profit. What the term “nonprofit” actually means, though, is that all funding received needs to be reinvested into the organization. It’s good to budget for a surplus if you can—you’ll be in a better position if some expenses are higher than you predicted or a funding source falls through, and you can use any leftover revenue to build a reserve fund for your nonprofit.
Taking Restricted Funds Into Account
The overall point of nonprofit accounting is accountability—demonstrating to stakeholders that your organization is using its funding to further its mission. One major way this figures into developing your budget is in the form of restricted funds, or revenue that has been designated for a specific purpose.
Generally speaking, there are three types of funding your nonprofit may receive:
Unrestricted funds. This type of revenue can be put toward any area of your nonprofit’s budget that needs funding, whether that’s administrative, fundraising, or program expenses.
Permanently restricted funds. These usually take the form of endowments, which your organization won’t spend directly but will instead earn interest on and then spend that interest on a specific initiative.
Temporarily restricted funds. These funds are bound by a time limit or specific purpose. Once the time has passed or the purpose is fulfilled, any leftover funds are released from restrictions. For example, if a major donor contributes $50,000 toward a building project, but your nonprofit has only used $48,000 of it by the time the project is completed, the remaining $2,000 is transferred to your unrestricted revenue and can be used to cover other expenses.
Many major donors and grantmakers place restrictions on their nonprofit contributions, so they can know exactly how their funding will further a cause that’s important to them. Your organization essentially makes a promise by accepting these contributions. By honoring your commitments as you develop your budget, you can build stronger relationships with these funders that benefit both parties long-term.
Your nonprofit’s operating budget, along with the other types of budgets you may create, helps your organization manage finances effectively in order to further your mission. When categorizing your revenue and allocating expenses, remember to take restricted funds into account in order to remain accountable to and transparent with stakeholders.
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