Nonprofit Budgeting: A Practical Guide
A nonprofit’s budget is more than just a set of numbers; it’s a statement of the organization’s mission and goals. An effective budget reflects both the resources the organization expects to receive and how those resources will be used to achieve its objectives. In this guide, we will provide a more in-depth look into the budgeting process, delve into different budgeting methods, and follow a fictional nonprofit, “Feeding Our City,” through the steps to create their budget.
Nonprofit Budgeting Methods
There are several budgeting methods available for nonprofits, each with its advantages and challenges:
- Incremental Budgeting: This is a simple method where the previous year’s budget is used as a base, and adjustments are made based on expected changes in income and expenses. It is efficient and practical for smaller nonprofits.
- Zero-Based Budgeting: In this method, each expense must be justified for each new budget period. This requires more time and effort but can result in more accurate budgeting. It can be beneficial for larger nonprofits or those undergoing significant changes.
- Program-Based Budgeting: This method allocates resources based on programs or services. It can provide a better understanding of the true cost of each program but may require a more complex financial tracking system.
- Performance-Based Budgeting: In this approach, budget allocations are tied to performance objectives. While it can promote efficiency and accountability, it requires a clear definition of performance measures and may not be suitable for all nonprofits.
For the purpose of this guide, we will focus on the incremental budgeting method, as smaller nonprofits commonly use it due to its simplicity and practicality.
A Step-by-Step Guide to Nonprofit Budgeting
Let’s follow our fictional nonprofit, “Feeding Our City,” through the process of creating an incremental budget.
Step 1: Review the Current Financial Situation
“Feeding Our City” starts by reviewing its financial situation. They examine their current income sources, including grants, donations, and fundraising events, and consider their sustainability. They also review their expenses, such as salaries, program costs, administrative expenses, and any expected changes.
Step 2: Identify Goals and Objectives
Next, they identify their organizational goals for the upcoming budget period. For instance, they plan to serve 20% more meals in the upcoming year, which will require additional resources.
Step 3: Estimate Income
To estimate income, “Feeding Our City” looks at each of their income sources. They consider the reliability of each source, and any anticipated changes, and make conservative estimates for the coming year.
Step 4: Estimate Expenses
They then forecast their expenses, keeping in mind their goal of serving more meals. This will increase their program costs, and they factor this into their budget. They consider both fixed and variable costs and include overheads.
Step 5: Balance the Budget
“Feeding Our City” compares their projected income and expenses. Since their goal of serving more meals requires additional resources, they brainstorm ways to increase income or decrease other expenses to balance their budget.
Step 6: Approval and Implementation
After they’ve balanced the budget, they present it to their board for approval. Once approved, they implement the budget and use it as a guide for financial decisions.
Step 7: Monitor and Adjust
Throughout the year, “Feeding Our City” regularly compares their actual income and expenses with their budgeted figures. If there are significant deviations, they make necessary adjustments.
Summary of “Feeding Our City’s” Budget
After going through the budgeting process, “Feeding Our City” has a clear financial roadmap for the upcoming year. Their budget reflects their organizational goals and the resources needed to meet those goals. It includes detailed income and expense categories, each with conservative estimates. For example:
- Income Categories:
- Individual donations: $150,000
- Corporate sponsorships: $75,000
- Grants: $200,000
- Fundraising events: $50,000
- In-kind donations: $25,000
- Expense Categories:
- Program costs (including additional costs for serving more meals): $375,000
- Staff salaries and benefits: $80,000
- Administrative costs: $30,000
- Fundraising expenses: $15,000
With a balanced budget of $500,000, “Feeding Our City” is prepared for the upcoming year. They plan to serve more meals to those in need and have allocated resources accordingly. They also have a plan in place to monitor their financial performance and make adjustments as needed.
The Short Summary
Budgeting is a vital financial management practice for nonprofits, regardless of the method used. For smaller nonprofits like “Feeding Our City,” incremental budgeting can be a practical choice. By building on the previous year’s budget and making adjustments based on anticipated changes, nonprofits can create an effective budget that supports their mission and goals.
Unique Perspective: Nonprofit Budgeting as a Communication Tool
While many view budgeting primarily as a financial tool, it also serves as a critical communication device within a nonprofit organization. When approached with this perspective, budgeting can foster open dialogue about an organization’s priorities, help align teams around shared objectives, and engender a deeper understanding of the nonprofit’s overall mission.
Budgeting and Organizational Priorities
Budgeting provides a quantifiable reflection of an organization’s priorities. The funds allocated towards different areas highlight what is valued by the organization. As such, the budgeting process provides an opportunity for internal discussions about these priorities and how they align with the organization’s mission. It allows board members, staff, and even volunteers to understand better where the organization is headed and what it will take to get there.
For instance, if “Feeding Our City” allocates a larger portion of its budget towards program costs and serving more meals, it sends a clear message to its members and stakeholders about its focus on direct services.
Budgeting and Team Alignment
A well-structured budgeting process encourages various teams within the organization to collaborate and align their specific objectives with the nonprofit’s overall goals. This cross-functional collaboration not only ensures financial feasibility but also fosters shared responsibility for the organization’s financial health.
In our “Feeding Our City” example, the fundraising team’s budget for the year would be directly linked to the targets set by the services team. Both teams thus have a shared stake in meeting their goals, fostering inter-departmental cooperation and mutual support.
Budgeting and Mission Understanding
The budgeting process, particularly when it’s transparent and inclusive, can promote a deeper understanding of the organization’s mission among its members. By clearly laying out how each dollar is intended to be used, the budget underscores the link between the organization’s financial choices and its mission.
In “Feeding Our City,” it’s not just about balancing the books – it’s about delivering as many meals as possible to those in need. Understanding this can imbue each financial decision with a sense of purpose and meaning, motivating all those involved in the organization.
Wrapping Up
Viewing the budgeting process from this unique perspective can benefit a nonprofit organization substantially. It shifts the narrative from budgeting being a tedious necessity to a valuable communication tool that promotes engagement, understanding, and alignment toward a shared mission. This shift in perspective might just be the key to unlocking more meaningful and productive budgeting processes in nonprofits.
FAQ
Q: What is incremental budgeting? A: Incremental budgeting is a method where the previous year’s budget is used as a base, and adjustments are made based on expected changes in income and expenses. It is efficient and practical for smaller nonprofits.
Q: What are the steps in the budgeting process? A: The budgeting process generally involves reviewing the current financial situation, identifying goals and objectives, estimating income and expenses, balancing the budget, seeking approval, implementing the budget, and regular monitoring and adjustment.
Q: What are some budgeting methods for nonprofits? A: Nonprofits can choose from several budgeting methods, including incremental budgeting, zero-based budgeting, program-based budgeting, and performance-based budgeting. The best choice depends on the nonprofit’s size, complexity, and specific needs.
Q: How do I know if my nonprofit’s budget is effective? A: An effective budget aligns with the organization’s mission and goals, is based on realistic income and expense estimates, balances income with expenses, and is regularly reviewed and adjusted based on actual performance.
Additional Reading
- Nonprofit Budgeting Toolkit – Wallace Foundation
- Nonprofit Finance Fund
