The Ultimate Guide to Nonprofit Budgeting
Budgeting for nonprofit organizations is particularly difficult, since they have to rely on inconsistent sources of income to survive. This income invariably comes from a variety of sources, making budgeting even more complicated.
Nonprofits, more than any other type of organization, need to plan for every contingency if they are to continue to operate and achieve their goals.
Nonprofits must also act with complete transparency when it comes to their finances in order to maintain their reputation. This means it’s essential to establish clear lines of communication with donors, funding sources, and tax authorities.
They need to establish clear administrative procedures within the organization itself, to explain how funds are used, so a good team collaboration tool is a must.
In this post, we’ll examine some key aspects nonprofits should consider when budgeting.
1 Establish a volunteer budgeting committee
Members of the committee should be selected in accordance with their knowledge of and familiarity with the nonprofit’s activities. It’s also important committee members have the organization’s – not their own – interests in mind when serving. Ideally, committee members will also have a sound understanding of budgeting, and know how to use relevant budgeting tools.
The committee’s objectives should be to:
- Estimate when expected revenues will be acquired
- Estimate how much it will cost to achieve the organization’s goals
- Create a budget timeline
- Compare expected revenue dates with estimated expenses accounted for in the budget
- Present the budget for approval
- Always act in accordance with all regulatory and compliance requirements. E.g., ensuring the fair compensation of employees
2 Set goals and priorities
Nonprofits should create a comprehensive list of objectives, keeping in mind historical income and expenditure. This is so that realistic goals can be set and accepted by the organization. The goals will underpin the budgeting process going forward.
3 Define responsibilities and tasks
All employees, including the budget committee members themselves, should have clearly defined roles and responsibilities. Everyone should understand the part they have to play and which tasks should be delegated to whom. Effective cross team collaboration is crucial so that everyone is on the same page.
4 Understand expenses involved in attaining goals
It’s essential that the budgeting committee establishes the cost related to each independent objective. This can be based partly on historical data relating to the organization’s activities in previous years.
The budget must also, however, take into consideration any new activities or programs that are planned. For example, the additional costs involved in onboarding a new sales software for fundraising merchandise, or monies that will be required for ongoing website upgrades.
5 Develop a realistic budget timeline
Accurate forecasting is a key element of the budgeting process. The budget timeline must be realistic and achievable, as well as approved by the company board. The timeline is essential to organizing the nonprofit’s activities, and a realistic budget will enable the organisation to attain its targets.
In order to develop a budget timeline, the committee must examine its goals and projected costs. Then, deadlines and targets can be organized around these variables. The more detailed the timeline the better. If only because board members will be more likely to approve a comprehensive schedule.
Depending on the complexity of this task, it may be worthwhile investing in home office broadband to help remote members. There are many examples of software tailored to nonprofit organizations.
While it’s always a good idea to be ambitious, the budget timeline must be as realistic as possible. You must remember, though, that budgeting for nonprofits is extremely challenging. Budgets should be seen as outlines that serve as plans which will inevitably be subject to change.
For example, it may become apparent that the organization is in vital need of a new and cheaper video conferencing platform in order to improve fundraising activities. They can check out Skype alternatives and browse for good options.
A balance needs to be struck between having the ambition to do the most good and managing expectations sensibly.
6 Projected income
Without any income, an organization cannot achieve its goals. Developing a comprehensive list of sources of revenue, expected revenue, and estimated total revenue is a major element in the budgeting process. Revenue streams include private funders, government contracts, or foundation grants.
Projected revenue restricts the organization when it comes to setting both goals and expenses. It should also define the timelines by which projects must be completed. Projected revenue must therefore be compared to a nonprofit’s estimated costs. Then, the budget committee can reimagine the budget to make it as comprehensive and realistic as possible (so that, hopefully, it will get approved by the board).
7 Establish a reserve fund
Budgets are simply plans that companies need to make in order for them to achieve their goals. Things often, often, fail to go to plan.
For this reason, nonprofits ideally need to have access to a reserve fund that’s been built up over the previous years. However, research indicates that 13% of non profit organizations are failing to set up a reserve fund at all.
Without a reserve fund in place, the only option is to plan to accrue more income than the organization spends going forward. Doing so helps to ensure there will be a fund available in subsequent years.
Having access to a reserve fund means the organization will be able to address any unplanned expenses that could derail the budget. It’s important that everyone within the organization understands the strategic importance of establishing a reserve fund, and that it’s there to ensure ongoing stability.
If, for example, an important donor pulls out, a nonprofit will lose lots of projected income overnight. They may be unable to replace depreciated infrastructure, or be unable to implement new technology such as a free conference call to equip remote office workers.
With a reserve fund in place, there’s less pressure on the organization. A source of revenue is there to help overcome bumps in the road, with the impetus on replacing any lost sources of revenue over time.
Nonprofits are naturally preoccupied with bringing in more money so they can do more good for their cause. However, a surprising number fail to scrutinize how their existing money is being used or establish sufficient contingency plans. By setting up a solid budgetary process and ensuring everyone understands the importance of caution to maintain financial stability, nonprofits will be in a better position to achieve their goals.
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