If it’s time to create your budget for the upcoming year, congratulations. Your nonprofit budget is your best friend and the source of direction for all of your operations during the year. I know working on the budget may feel like torture, but it is one of the most important documents to support your nonprofit organization. It can actually be exciting to create.
Here are three reasons the annual budget is your best friend.
- Budgets provide a view of operations through numbers.
For some, numbers are scary, but budgets don’t need to be. Similar to your personal or home budget, your organization budget creates a guide to manage your finances each month. It lets you project how much income you need for operations during the year and identify the source of that income. For instance, you can list income sources as grants, donations, events, or other fundraising. Depending on your organization, you might project income generated from membership, services, or programs fees. After determining your projections for the year, allocate that income to various expenses needed to operate the nonprofit business. These expenses include salaries and benefits (don’t forget all mandatory employee benefits), rent, supplies, costs associated to operate your programs, services, and insurance and so on. Include as many expense categories as necessary to prevent underestimation of overall expenses. In general, it’s best to estimate income conservatively and estimate expenses generously.
- Budgets are a working document for financial controls.
Once you create your budget, you have to manage it. Each month the budget should be a part of your financial reports which include your Statement of Activities (Profit and Loss statement), Statement of Financial Position (Balance Sheet) and the Statement of Cash Flow. Compare the amounts you budgeted for each account shown on these statements to the actual monthly amounts to understand your current financial position. Hopefully you’ll meet or exceed your income projections while keeping the expenses in range or lower than projected. You might also get the opposite, that is, less income than projected or higher expenses, but you’ll be able to make adjustments to the budget to keep your operations on path. Your board treasurer and bookkeeper should be your helpers in these areas.
- Budgets guide the strategic operations of the organization.
Use your nonprofit budget to guide your strategic operations. Having determined the goals that will drive your mission for the year, you now have a projected dollar amount to support those goals. Use the budget and current financial statements to monitor your finances and determine if you can meet the goals or if you need to make adjustments. For example, you might have projected adding another employee position. If you find you’re meeting the projected income goals for the new employee, you can move ahead with that goal. However, if the income is not there (or not foreseeable), you might need to adjust the goal. (This doesn’t mean you can’t get the position filled in some manner. For example, you might seek a volunteer to get the help you need. Sometimes, that person might be the one to help you reach the financial projections for the year.) Another example of how your budget guides your strategic operations occurs when you analyze if you have enough income to manage your programs or services, or if you need to seek more private donations and grants. Your budget can even help you project if a fundraising event is feasible or if you should look for money in a different manner. Reviewing budget results each month lets you know how much you’re spending in each expense category and where you might have enough or need to cut back on expenses.
If you need help in the budgeting process with your best foot forward, here are the following resources:
For smaller nonprofits that are entirely volunteer-run, the Virginia Society of Certified Public Accountants offers this handy guide to help you address the budgeting challenges unique to your organization and resources. Budgeting for Small NPOs
For larger organizations, nonprofit consultant and author Joan Garry outlines an innovative strategy to creating a budget that is meaningful and realistic for all the stakeholders within your organization – board, fundraising staff/volunteers, and program staff/volunteers: https://www.joangarry.com/budgeting-for-nonprofits/
These tips are certainly not all of the uses for your annual budget, but you can see how important the budgeting process is. Like a good friend, treat it well, pay attention to it, and it will be your guide to successful operational planning.