July 7, 2022 | 7 min read
Building a Nonprofit Budget
Welcome back to the Friday Five! For this week’s topic, we choose what is sure to be a crowd pleaser: budgeting!
…well maybe that’s a stretch, but we can all agree this is a super important element for a successful year. The more time you give yourself to complete a budget, the more accurate and realistic your projections will be. You will also have a better chance at staying on track throughout the year.
So, without further ado, 5 tips for building your nonprofit budget:
1. Start WAY in Advance of Your Deadline
Forecasting a budget for a full year takes both time and energy. If this is your first budget, lucky you, it will most likely require more of both. Starting early gives you ample time to plan and build a structure. A great place to begin is by making a monthly template which you can use to break up and structure your budget. Once you have created a monthly template it will be easy to copy the format across the remaining months. Next, all planned or expected expenses can be added in their respective month(s).
Having the information organized is only one part of the process. To really build a solid budget, you’re going to need access to your managers / directors, historical data, and any online information. Gathering input from your managers and directors allows you to get a better idea of any part of the budget that might be on the fringe of approval. This can also be a good time to ask about possible future change within the organization. Or even feel out adopting a new software, such as a CRM.
And since all this stuff takes – you guessed it – time and energy, better to start early to save stress later.
2. Use Historical Financials if Available
These are hugely important and informative resources. If available, they can and should be used to your advantage. By aligning your organization’s chart of accounts over the last few years you will have a guide for estimated spending. For newer organizations who do not have multiple years of historical financials, even one reference point helps. This is two fold as you can then rely on your history to display actual spending rather than estimated spending.
Assuming that you begin with making the monthly templates, this historic data will lay the groundwork for creating next year’s budget. This is especially useful for recurring events or expenses as you have real data which can be scaled for this year’s totals.
3. Break Up Your Expenses
Financials can then be broken down into fixed and variable costs. Fixed costs are those that are independent of volume. Fixed costs tend to be costs that are based on time rather than the quantity produced or sold or solicited. Examples of fixed costs are rent and lease costs, salaries, utility bills, insurance, and loan repayments. Variable costs are costs that change as the volume changes. Think of this like having to increase the cost to host an event if the demand is higher than expected. You might turn in a higher net donation amount, but there will be variable costs exposed to increases based on the increase in demand. Examples of variable costs are raw materials, production supplies, commissions, delivery costs, packaging supplies, and credit card fees. In some accounting statements, the variable costs of production are called the “Cost of Goods Sold.”
While fixed costs are largely static, variable costs leave room for things that can not be accounted for. The worst type of variable costs: the unforeseen ones. To combat this, create a miscellaneous line item with room for contingency spending.
4. Do Not Forget Your Money Maker
Even as an NFP, it is still important to bring in revenue to track against your expenses. Next to the mission, fundraising is the bread and butter of any organization. Unfortunately, the donation pool is not equal for all nonprofits. According to Forbes, the top 100 charities in the United States collectively received almost 12% of all charitable giving in 2020. While donations are increasing, a majority of donors are giving to only the top 100. So, while charitable giving has increased, smaller NFPs do not see the same return.
Use the budgeting process to identify opportunities to enhance or augment fundraising to further the mission. Think about what you already do – or can start doing – to generate revenue. Do you sell any merchandise? What about ticket sales for events? Build growth initiatives into your budget to ensure optimal lines of revenue and other areas of positive cashflow to offset any lean years you might have.
We totally understand a nonprofit’s primary goal is not to bring in the green stuff, but it sure makes it easier to accomplish your mission when you have it. So budget accordingly for your initiatives to ensure the best chance at success.
5. Set Realistic Expectations
Everyone wants to crush last year’s donations while reducing expenses. That can happen over time, but in reality it’s unlikely to happen year-over-year. This is where operating within reason comes into play.
Understand where you are, work internally with stakeholders to figure out where you need to be and set a few stretch goals in your budget that won’t hamstring the organization if not met.
Be sure general operating expenses are covered, add in line items for the initiatives critical to your success and build a buffer in case of a rainy day.
Oh, and start early!
Let us know which tip worked best for you or if you have any others.
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