Building a nonprofit budget: 4 steps to get started
Once you’ve established a new nonprofit, one of your first considerations will likely be fundraising. After all, the only way you can fulfill your organization’s mission is if you can bring in the funding you need to support your programs and initiatives.
You should also have a plan for how to effectively manage your funding, which is where your financial strategy comes into play. This includes creating an annual operating budget, a document that breaks down your organization’s revenue, or the money you’ll bring in, and expenses, or the money going out to cover your costs, for each fiscal year.
In this guide, we’ll walk through four essential steps to build an operating budget for your new nonprofit. As you follow this process, always remember to align your budget with your organization’s general goals and plans for future growth.
1. Set financial goals for your organization
Before creating your operating budget, check in with your strategic plan. Since it defines your organization’s overarching priorities, you should organize your budget in a way that enables your nonprofit to achieve those goals.
Your strategic plan can also give you a sense of some of the expenses you’ll incur as you work toward achieving your priorities in the coming year. For instance, you might discover that you need to anticipate costs related to:
- Launching new mission-focused programs
- Hiring and onboarding new employees
- Reaching out to potential donors and volunteers
Create a rough list of these costs and highlight the ones that will apply to the coming fiscal year. Then, add them together with your existing expenses, such as rent, bills, and salaries for your current staff members. Use this estimate to set an overall goal of how much revenue you’ll need to bring in to cover all of your costs for the year.
2. Organize your expenses by function
Now that you understand your nonprofit’s financial goals, it’s time to begin drafting your budget. Since you’ve already identified many of your organization’s expenses, start by outlining and categorizing those costs.
Most nonprofits categorize their expenses by function and when they’ll occur, which is the way each cost impacts your mission. This approach also maintains consistency with their end-of-year financial reports. The three main types of functional expenses are:
- Program costs. These expenses are directly related to the program activities and services that further your nonprofit’s mission. For instance, an animal shelter would include expenditures on food and veterinary care for the dogs and cats they rescue under their program costs.
- Administrative costs. This category includes expenses related to operating your organization, such as rent, utilities, and staff salaries.
- Fundraising costs. These include all of the upfront expenses incurred while planning and executing your fundraising campaigns. Event planning, marketing costs, and fundraising software purchases fall into this category.
Your administrative and fundraising expenses put together make up your nonprofit’s overhead. Contrary to popular belief, overhead isn’t inherently bad—it’s actually necessary to keep your organization running.
3. Categorize revenue by source
Next, turn to the revenue side of your budget to figure out exactly how and when you’ll raise the funds you need to cover all the costs you outlined. Budgeting your revenue based on its source allows you to make the most accurate projections. Plus, if you know exactly where all of your funding comes from, it’s easier to respond to fluctuations in fundraising throughout the year.
The primary revenue categories in your operating budget should include:
- Individual donations of all sizes, including those received during fundraising events.
- Corporate philanthropy initiatives such as matching gifts and sponsorships.
- Grants funding provided by government entities and foundations.
- Earned income from merchandise sales and membership fees, if applicable to your organization.
A common budgeting myth is being a “nonprofit” means your organization can’t make a profit. In reality, your goal should be to budget for a revenue surplus—where your total revenue outweighs your total expenses. That way, you’ll have additional financial flexibility in case some costs are higher than expected. It also means any extra funding you have at the end of the year can be put into a long-term savings account for your nonprofit.
4. Finalize your budget, then review it regularly
After reading over the complete draft of your nonprofit operating budget and revising any inconsistencies or unclear information, send it to your board of directors for approval. Make sure this happens well before the new fiscal year begins, so you have time to make any last-minute edits that the board recommends.
This effort isn’t a one-and-done event but rather an ongoing process. This means you’ll want to review your forecasted revenue and expenses against your budget on a regular basis. A forecast simply takes into account what you’ve made and spent to date, so you can adjust your projections accordingly. At least once a month, you should compare your forecast to your budget to ensure you’re on track to fulfill your mission.
A solid annual operating budget is at the core of an effective nonprofit financial management strategy. The more thorough and accurate your nonprofit budget is, the better you’ll be able to serve your community, maintain financial transparency with your supporters, and fulfill the mission that led you to establish your organization.