Budgeting 101: Best Practices for Creating and Managing a Successful Budget

While every organization needs a budget to guide its finances, budgeting often has particular importance for nonprofit organizations because they need to keep donors informed, prioritize their mission goals, and structure annual plans.

Learning the fundamentals of budgeting – including creating and managing an effective budget – is an essential step to success. Even if you hire professional accounting services, knowing these fundamentals helps position your organization for success in several ways. Let's look at some of the most prominent best practices for NPO budgeting.

How Nonprofits Benefit From Effective Budgeting

At a high level, budgeting provides non-profits with essential financial control by tracking income and expenses to ensure efficient use of funds. It helps align financial resources with strategic goals and program priorities. Budgeting also enhances accountability and transparency, strengthening donor confidence and ensuring compliance with regulatory requirements. Furthermore, it facilitates performance measurement by setting financial benchmarks, allowing organizations to assess progress and make informed decisions.

On a more specific level, creating and managing a successful budget helps nonprofits:

• Release reports showing donors and board members how money was used to reach mission-critical goals
• Find opportunities to trim unnecessary spending and redirect money to essential programs
• Complete grant and other funding requests
• Track spending to avoid debt
• Time incoming funds with big expenses
• Measure the effectiveness of fundraising campaigns over time

Budgeting might also help your nonprofit in other ways, depending on its unique role. Regardless, tracking where your money comes from and how you spend it is always a good idea to follow the best practices below.

How to Set and Reach Financial Goals

Every nonprofit leader wishes they had unlimited funding to fulfill their missions. Still, NPO leaders know that the path to success is achieved by accepting reality in order to set achievable financial goals. 

Keep Goals Reasonable

Setting and reaching realistic financial goals involves steps most NPO leaders will find intuitive. Start by looking at your income from previous years for guidance on what to expect for the current and coming financial years. If you raised $1 million last year, you are unlikely to raise $5 million this year. You can increase your target amount, but it is best to be conservative in estimating funding growth. Anything over a 10% increase is probably ambitious.

Specifically, NPOs can set realistic financial goals by starting with a comprehensive assessment of their current financial situation, including income sources, expenses, as well as assets and liabilities. Additionally, analyzing historical financial data and NPO sector trends can help make informed projections and adjust goals as needed to respond to changing circumstances. Canadian charities are obligated to make their financials public. This is an excellent source of sector financial information for comparative financial analysis.

NPOs should aim to align new financial goals with their organizational mission and strategic plan to ensure relevance and impact. They should also incorporate the SMART criteria—making goals Specific, Measurable, Achievable, Relevant, and Time-bound—which can enhance clarity and feasibility. Important best Practice: Engaging stakeholders like board members, staff, and donors in the goal-setting process can provide valuable insights and foster commitment. Additionally, analyzing historical financial data and industry trends can help in making informed projections and adjusting goals as needed to respond to changing circumstances.

You also need to consider how you will reach the goals you set. If you have donors you can rely on for financial support, keep them engaged so they continue sending you money. The same goes for any previous private and government grants you've gotten. 

Grow Your Funding Sources

Don't forget to explore new fundraising opportunities. Could you partner with local businesses? Would a new marketing campaign reach more donors?

Canadian non-profits can diversify their funding sources beyond individual donations through several strategies:

1. Government Grants and Funding: Apply for grants at federal, provincial, and municipal levels. Various government programs offer financial support for non-profit initiatives aligned with public policy goals.
2. Corporate Partnerships and Sponsorships: Collaborate with businesses for sponsorships, donations, or in-kind support. These partnerships can provide financial resources and enhance visibility.
3. Membership Programs: Implement membership models where supporters contribute regular fees in exchange for benefits, newsletters, or exclusive content related to the organization's mission.
4. Social Enterprise Activities: Generate income by offering products or services that align with your mission, such as training workshops, consulting services, or merchandise sales.
5. Fundraising Events: Host events like galas, auctions, concerts, or community activities to raise funds and engage supporters in person.
6. Crowdfunding and Online Campaigns: Utilize online platforms to reach a broader audience. Crowdfunding can attract small donations from many individuals, amplifying your funding base.
7. Planned Giving and Endowments: Encourage donors to include your organization in their wills or establish endowment funds for long-term financial stability.
8. Foundation Grants: Seek funding from private and public foundations that support non-profit work in specific sectors or communities.
9. Collaborative Funding: Partner with other non-profits to apply for joint funding opportunities or share resources, reducing costs and expanding impact.
10. Fee-for-Service Models: Charge fees for certain services or programs, especially if they provide significant value to beneficiaries who can afford to contribute.
11. Investment Income: If applicable, generate revenue through investments or property rentals, adhering to regulations governing non-profit income generation.

Diversifying funding enhances financial stability and broadens the organization's network and impact. It reduces reliance on a single source, making the non-profit more resilient to economic fluctuations.

Consider these and other options. Because of the limited resources most NPOs face, it is best to introduce new approaches slowly to see how well they work instead of starting several new fundraising campaigns at once.

Choose Between Different Budgeting Methods

Zero-Based Budgeting

Zero-based budgeting (ZBB) is a budgeting method where each new budget cycle starts from a "zero base," requiring all expenses to be justified from scratch rather than adjusting the previous period's budget. This approach involves evaluating and prioritizing every program and expense to determine their necessity and efficiency.

How Zero-Based Budgeting Can Help Non-Profits:

1. Enhanced Resource Allocation: By scrutinizing each expense, non-profits can ensure that funds are allocated to programs that most effectively advance their mission and have the greatest impact.
2. Cost Efficiency: ZBB helps identify unnecessary or redundant expenses, enabling organizations to reduce costs and eliminate wasteful spending.
3. Strategic Alignment: The process encourages aligning expenditures with strategic goals, ensuring financial resources support the organization's priorities and long-term plans.
4. Improved Accountability: Detailed justification of expenses increases transparency, strengthening trust with donors, stakeholders, and regulatory bodies.
5. Flexibility and Adaptability: Starting from zero allows non-profits to more easily adjust to changing financial circumstances, such as fluctuations in funding or shifts in program demands.
6. Enhanced Financial Discipline: ZBB promotes a culture of careful financial management and encourages staff to think critically about the necessity and efficiency of their budget requests.

While zero-based budgeting can be time-consuming due to its detailed nature, it can significantly benefit non-profits by ensuring that every dollar is purposefully spent to further their mission.

With zero-based budgeting, you know exactly how you plan to spend every dollar. It tends to work well when you have fixed expenses that rarely fluctuate. You might have a $0 balance at the end of the year. That's OK because you've covered your expenses and have more funds for the new year. If you have some money left over, that's even better. Move the excess funds to savings or add them to next year's budget.

Incremental Budgeting

Incremental budgeting is when a non-profit organization uses its previous budget as a starting point and makes adjustments by adding or subtracting amounts based on projected changes for the new period. This approach focuses on incremental changes rather than reevaluating all budget items from scratch.

Benefits for Non-Profits:

1. Simplicity and Efficiency: Incremental budgeting is straightforward, saving time and administrative resources. Staff can quickly adjust the budget without extensive analysis, allowing more focus on program delivery.
2. Financial Stability: By building on the previous year's budget, non-profits can consistently fund essential programs and operations, providing a stable financial environment.
3. Predictability: It offers predictable budgeting outcomes, making forecasting financial needs and managing cash flow easier.
4. Ease of Implementation: Organizations with limited financial expertise or resources find incremental budgeting accessible, reducing the need for specialized budgeting skills.
5. Encourages Gradual Improvement: Small adjustments can improve financial performance over time without overwhelming the organization with significant changes.

However, non-profits need to be cautious, as incremental budgeting may not account for significant shifts in the external environment or organizational priorities. Periodically incorporating zero-based budgeting or thorough reviews can help ensure the budget remains aligned with strategic goals.

Its main benefit is simplicity. With incremental budgeting, you review what has already worked well and look for anticipated changes. For example, your Q1 budget might have included a lot of fundraising expenses. Your Q2 budget, however, might have lower expenses and higher income as your fundraising efforts pay off. The advantage is that you can tweak your budget to meet the upcoming period's financial needs.

The Importance of Regular Budget Reviews and Adjustments

Creating a budget will help your organization make smart financial choices, but it can't anticipate every expense an NPO might encounter. Potential events highlight the importance of NPOs regularly reviewing and adjusting their budget. Your leadership and board can decide whether to reassess budgets monthly, quarterly, or annually.

Regular budget reviews and adjustments help non-profits ensure effective financial management and mission fulfillment. By routinely examining their budgets, non-profits can:

1. Monitor Financial Performance: Regular reviews allow organizations to compare actual income and expenses against their budgeted projections, identifying variances early on.
2. Identify and Address Variances: Spotting discrepancies between expected and actual figures enables non-profits to investigate the causes and take corrective action promptly.
3. Adapt to Changing Circumstances: Frequent adjustments help organizations respond to unexpected changes such as funding cuts, economic shifts, or emerging opportunities, ensuring financial plans remain relevant. Regular cash flow monitoring and planning are especially helpful in this regard.
4. Enhance Decision-Making: Up-to-date financial information supports informed decisions about resource allocation, program expansion, or cost-cutting measures.
5. Promote Accountability and Transparency: Regular reporting fosters trust with stakeholders, including donors, board members, and beneficiaries, by demonstrating prudent and responsible financial stewardship.
6. Improve Future Budgeting: Lessons learned from ongoing reviews can inform more accurate and effective budgeting practices in subsequent periods.

By prioritizing regular budget reviews and adjustments, non-profits can maintain financial stability, make strategic decisions, and ultimately enhance their ability to achieve their mission.

Tips for Tracking Expenses and Adjusting Budgets

Budgeting has a steep learning curve for some people. Here are some tips that make tracking expenses and adjusting budgets easier. You can start with:

• Including donated items and services that offset some of your expenses
• Creating Google Alerts that will let you know about potential funding sources like new grant and corporate giving opportunities
• Maintaining a spreadsheet of real-time expenses and funding
• Reviewing receipts and balance sheets for discrepancies
• Consulting with accounting services that have experience working in the nonprofit sector

Final Thoughts

Creating and managing a budget successfully isn't impossible, but it takes a lot of work. Many nonprofits outsource their accounting services to focus on doing mission-critical work instead of tracking financial data. After all, NPOs probably didn't get into the nonprofit sector because they want to spend time filling out spreadsheets.

Enkel offers straightforward, cloud-based professional bookkeeping and accounting services designed for nonprofits. We'd love to talk about how we can help your organization achieve its goals. Contact us to learn more about how our experience can help your NPO succeed.