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How to create a nonprofit budget: Best practices for successful financial planning
Posted by Grace Townsley
May 17, 2023
Operating your own nonprofit organization can be an incredibly rewarding experience. Whether you’re running a charitable group for your community, a private foundation that supports education or a political group pushing for positive change, creating a nonprofit can have a huge impact on the area you serve.
However, the financial complexities that accompany nonprofit management can quickly overcome the good work you aim to do. And when it comes to creating a realistic budget and a successful financial plan, you may feel completely overwhelmed.
If you’re unsure of how a nonprofit budget differs from a traditional business budget, or how to create one for yourself, read on.
By following the guidelines below, and leveraging the help of a professional financial services team as needed, you can set your nonprofit up for meaningful impact.
Nonprofit budgets vs. for-profit budgets
If you have experience with business budgeting, you’re familiar with revenue, expenses and profit. But because nonprofits don’t typically rely on the sale of goods or the creation of products to drive their income, nonprofit budgets follow a largely different format.
Here are four major ways these two budget types differ:
Nonprofit budgets are mission-focused. You’ll notice nonprofits’ budgets and financial plans are focused on programs, services, donations and outreach work. You typically won’t see line items like Research and Development on nonprofit budgets, because these organizations focus more on social and local goals.
Multiple revenue sources. While for-profits mainly benefit from the revenue generated by their key product or services, nonprofit revenue comes from several sources. You’ll see sources like grants, donations, sponsorships and fundraising events in a nonprofit’s top-line budget report.
Greater transparency. Nonprofit budgets are required to be much more transparent than for-profits’ because nonprofits aren’t protecting trade secrets or competing with other organizations, and their revenue is largely from donations and grants. That’s why nonprofits are required to outline how their funds are earned and allocated, often in great detail.
Volunteer and in-kind contributions. For-profits consider employees an expense. But for nonprofits, volunteers are more of an asset. The work hours volunteers provide impact the budgeting process by reducing the number of employees the organization must support.
These are the key differences between nonprofit and for-profit budgets, but there are many more. Before you sit down to create your budget, we recommend partnering with an experienced professional who can base your budget on your nonprofit’s specific circumstances.
Best practices for building your nonprofit’s budget
To align your nonprofit’s budget with your mission, create financial stability, and effectively manage your limited resources, keep these budgeting best practices in mind:
Prioritize your programs and services. It’s easy to let expenses take up the majority of your budget. But to have a real impact in your community, put outreach programs and mission-oriented services first.
Forecast carefully. Relying on fundraising, grants and donations makes it difficult for nonprofits to predict future revenue. That’s why an advanced forecast, conducted by a nonprofit Financial Planning and Analysis professional, is essential. They can help you estimate both short-term and long-term expenses, plus the giving cycles that support your work.
Account for all possible expenses. Include both direct expenses (like outreach activities, events and administrative costs) and indirect expenses (rent, utilities and insurance) in your budget. The more accurate your predicted expenses, the easier it will be to generate the funds you need to cover them.
Once you’ve built your budget, communicate it clearly to every stakeholder involved. When your donors, staff and volunteers know exactly how much your nonprofit needs — and how it’s using every dollar — they’re more likely to serve and give with confidence.
How to successfully plan for your nonprofit’s future
It’s not enough to build a budget for the next year. Future-focused nonprofits, the ones that want to have a long-term impact on the community they support, must build a careful financial plan that prioritizes the mission and prepares for volatility.
The best financial plans start with clear goals. Ask yourself: How many people do I want to serve in the next few years? What will that cost? What might get in the way? The more clear your questions, the more specific, realistic and time-bound your financial goals can be.
Next, look for ways to diversify your nonprofit’s revenue. You may have a healthy budget this year, but what if one major donor doesn’t renew their support? Or what if the grant you’re relying on isn’t available next year? As you look to the future, consider opportunities to expand support and funding for your initiatives so you’re never reliant on a single source.
It’s also important to make a plan for reserving some cash every single year. Your reserve fund should be set aside for emergencies, market fluctuations, unexpected expenses or future expansion. The larger this reserve, the better positioned your nonprofit is for long-term stability.
Finally, seek professional support when possible. Running a nonprofit on your own isn’t easy — especially if you don’t have a background in finance. By leveraging a professional who knows the unique challenges nonprofits face, you can gain access to the critical insights you need to reach your community, navigate challenges and remain funded year after year.
Want more? Escalon has helped thousands of startups and nonprofits maximize their potential with our back-office solutions for accounting, HR, payroll, insurance, and recruiting and taxes — and we can help yours too. Talk to an expert today.
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact ushere.
As a professional copywriter in the finance and B2B space, Grace Townsley offers small business leaders big insights—one precisely chosen word at a time. Let's connect!