Everything You Need to Know About Your Nonprofit’s Annual Budget
It is budgeting season, which means it’s time for nonprofit leaders to dive deep into financial planning for the coming year. Here is what you absolutely need to know as you begin the budgeting process, especially if you are a new nonprofit leader.
Why create a nonprofit budget?
Simply put, the IRS requires a projected budget when you file your 1023 for the 501c3 tax-exempt status 501(c)3. Nonprofit boards are required to approve a budget during the fourth quarter of each fiscal year. However, there are many other reasons why a budget is vital to your nonprofit’s success. Financial planning and monitoring can be just as important to your financial health as fundraising, and approving a budget is a key component of your sound financial management. Donors, auditors, board, and partners are all looking for fiscal responsibility on your part.
Your budget should align with the strategic plan, so make sure the programs and activities are planned out for the coming year before tackling a budget.
When do I start the budgeting process?
When to start the budgeting process depends on your fiscal year. If the fiscal year starts on January 1, it is best to start the process in August of the previous year. (If the fiscal year begins July 1, then start the budgeting process in February). Remember, your board of directors needs to approve the budget during the fourth quarter of the fiscal year, usually October.
How do I put together a budget? (Especially if I’m a new nonprofit)
Putting together an annual budget can seem daunting, but can be made easier when broken down into smaller steps.
Start by setting internal deadlines for different steps in the drafting and review process so you know you’re on track.
Then, gather your board’s finance committee for a meeting to kickstart the process. If you’re a more established organization, you can use past financials as a reference point to inform your new budget. If you’re a new nonprofit, you may be starting from scratch, but you can use an online template to help you get started.
A budget has three main components: Operations, Programs, and Fundraising. For each component, you will have to itemize expenses and income. We recommend you always start with your expenses. Once you know how much money you plan to spend, you’ll be able to determine how much money you need to fundraise.
OPERATIONS include anything you need to help your nonprofit run, like rent, electricity, internet, taxes, bank fees, auditor’s fees, etc. There are many misconceptions about nonprofit operating expenses, like staff salaries should be kept low, or overhead is bad. These simply aren’t true. Like every type of business, nonprofits need to invest in operations to run sustainably. Operations usually consist of 5-15% of the total budget. Staff salaries can be spread out along operations and programs with the bulk of the salary in programs.
PROGRAMS includes a list of all the activities for the year. If you have separate programs, create a separate budget for each program. Write your expenses down to the paperclip supplies. Program staff and/or the Executive Director should provide input on programming expenses and income. A solid program budget constitutes 75-85% of the budget.
FUNDRAISING – think about your different fundraising initiatives (online fundraising, mailings, events, fundraising events, etc.) and how much each will cost to run. Fundraising expenses consist of 5-10% of a well-run nonprofit’s expense budget.
Once you list out your expenses, you can work backward to determine how much money you will need to raise, also known as revenue. Break down your revenue sources so you can measure fundraising success. For example, you might choose individual donors, major gifts, online fundraising, and grants as separate fundraising categories. Expect that you won’t have 100% success with your fundraising revenue streams, and plan to ask for more than you need. Ultimately, there will be some no’s.
Your budget does not have to break even. An annual profit margin is necessary to run operations and programs for the coming year and most donors see operating “in the black” as financial stability.
What is the process for getting a budget approved?
Usually, the board’s executive committee (NOTE: with small boards, this may be the whole board) or finance committee reviews and approves the budget before it goes to the full board. It is beneficial to involve board members early in the budgeting process to avoid resistance at the end of the process.
What are the main challenges nonprofits face when putting together a budget?
New nonprofits have to start from scratch, a process called Zero Based Budgeting (ZBB). ZBB budgeting can be challenging because, with no past data to work off, it can be difficult to determine what activities are needed and how much they will cost. ZBB also has many benefits; it helps you critically evaluate each expense, and ensure unnecessary expenses are eliminated. Ask yourself if each activity is necessary and if the amount of money budgeted for each one is necessary.
I have my budget completed and approved; now what?
A budget is meant to be a living document that is reviewed frequently. Compare your actual cash flow to your budget monthly, and do a deep analysis quarterly. You can always amend the budget if new circumstances arise. Be prepared to share your budget with donors. Make sure to let donors know that the budget is a working document and may change, such as an unexpected event like COVID.
Beyond an Annual Budget
Besides annual budgets, there are a few other types of budgets you may come across as a nonprofit leader.
- Capital Budgets outline expenses and revenue associated with large, long-term projects, like a new building.
- Program Budgets are portions of your annual budget that focus on a specific program. You may have to adapt a program budget to create a special budget for a grant or other funding request.