For nonprofit organizations, financial sustainability is closely tied to effective operational management. Since this includes both the timely review of financial activity—and the long-term planning of income and operating expenses—a solid NPO budget is essential to your organization’s financial health.
In this article, we’ll delve into the importance and benefits of having a strong nonprofit operating budget and look at some key considerations for creating one.
Why your NPO needs a strong operating budget
As a financial breakdown of the operational activities your NPO has planned for the coming year, your operating budget is essentially a projection of the revenue and expenses attached to various programs, funding sources, and overhead costs.
Unlike a capital budget—which breaks down major or one-time expenses requiring more than a fiscal year to fund (like construction costs, for example)—an operating budget helps align your organization’s strategic plan with its goals and objectives by:
- Bringing financial structure to your annual plans
- Helping you identify and prioritize mission-critical activities
- Providing a way to monitor your progress
Here are some of the biggest benefits of having a strong NPO budget.
It keeps your donors in the loop. Donors want to know their funds are being spent in accordance with their wishes. Many large donors and grant-makers, in fact, will request a budget before approving funding requests. By demonstrating accountability and transparency, a solid NPO budget reassures donors your organization is actively monitoring the planning and accounting process.
It keeps your board members informed. Maintaining a proper budget gives your board improved insight and control over revenues and spending. Not only does this promote more impactful coordination between your nonprofit’s programs, mission, and goals, it enables better decision-making by allowing board members to allocate funds more efficiently as cash flows change.
It keeps your organization focused on its mission and goals. Constructing your NPO budget around specific programs and activities makes it easier to set spending limits, keep costs aligned with revenue, and optimize current resources for growth. Since your activities will typically hinge on timing and availability of funds, a strong, strategic budget positions you to better fulfill your objectives.
4 Key considerations for creating your NPO budget
Here are 4 important considerations to keep in mind when creating the annual budget template for your NPO.
1. Leave sufficient time for the budgeting process
It will take time to create and get your annual budget approved—especially if you’re new to the process of budgeting for nonprofits.
To give your board sufficient time to review and accept your budget report, make sure you:
- Set a target date and create a timeline that will ensure board approval before the start of the next fiscal year
- Allow your team plenty of time to identify and collect essential data
- Initiate your budget review at least three months prior to your fiscal year-end
Budgeting will become a common practice with less effort if you regularly involve staff, volunteers, and your board. Not only will this lead to more accurate, comprehensive NPO budgets, it will encourage stakeholder buy-in at every level.
2. Work with realistic expectations
It’s important to work with real numbers as much as possible when creating your nonprofit budget.
For best results:
- Use last year's numbers as a starting point where possible, then add quotes received from vendors or partners
- Be sure to include the different types of program expenses (like direct and indirect costs, in-kind contributions, or capital expenditures) tied to specific activities
- Budget for fundraising/donations, which are not guaranteed funds, and use the last 2-3 years as a foundation. Having a budget for fundraising is important in bringing in enough money to cover the costs of whatever it is you are fundraising for - renovations, expansion, etc.
Creating a credible, comprehensive list of expenses and revenues is critical to program success. If your chances of getting a grant are slim, for example, it’s best to omit those funds from your budget.
3. Create a cash flow forecast
A cash flow forecast is a projection of the cash you expect to have coming in and going out in the year to come, based on your plans and activities.
Creating a cash flow forecast as part of the budgeting process will help you:
- Better plan the use of your cash around emerging opportunities and potential problems
- Track your performance by comparing cash projections and actual outcomes against your budget
- Identify and respond to potential cash deficits and surpluses in advance
If, for example, your organization expected to incur all its expenses during the first three months of the year—and all its revenue during the last three months—a cash flow forecast would highlight the need to build up a cash surplus for paying your expenses on time.
4. Monitor your budget throughout the year
Once you’ve created your budget, it’s important to compare the numbers you’ve predicted against your actual financial figures every month—and identify any discrepancies.
Noting where your budget is out of line shows you where to start drilling down and looking for changes your organization can make.
This is where your NPO budget truly shines as an operational management tool, since you can use it to facilitate:
- A more holistic overview of your nonprofit’s performance
- Speedier solutions to potential problems
- Better informed everyday decisions
While the process can be time-consuming, good budgeting rewards you with ongoing clarity into your operations, allowing you to manage your organization’s funds—and pursue your overall mission—more effectively.