It’s important in the nonprofit world for organizations to develop and follow financial budgets. Because nonprofits typically operate with limited funds, have restrictions on how funds can be spent, and must publicly report their expenses based on three functional areas, budgets play an important role in every nonprofit. Below is a list of best practices that nonprofits should consider before starting the budget process.
- Familiarize yourself with common nonprofit budgeting terms and concepts and utilize these terms when developing an organization’s budget policy. It’s important for everyone within the organization to use the same lexicon to avoid confusion and ensure mutual understanding.
- Develop a plan. Developing an organizational budget takes time and it requires input from across the organization. Producing a well-thought out plan and making sure staff adhere to deadlines will help systematize a complicated process. Ensure each task has clear responsibility assignments and stated deadlines. Be sure the timeline leaves adequate room for researching costs, reviewing assumptions, providing feedback, undergoing budget revisions, and preparing final documents for management and the Board of Directors.
- Create budgeting tools that are easy to use and that conform to the organization’s chart of accounts. Although training staff on the use of any budgeting tools is essential, designing tools in an easy to follow format will ensure staff are not spending hours trying to understand templates and sitting through countless trainings. Likewise, creating templates that conform to the organization’s chart of accounts, and ideally designed to be uploaded into accounting systems instead of re-entering numbers, will ensure finance staff can easily generate budget-to-actual reports throughout the year.
- Make sure employees responsible for adhering to the budget and implementing organizational objectives are involved in creating the budget. By-in is critical to ensuring staff adhere to the budget and do not treat the budget as an after-thought.
- Review the organization’s strategic plan. Make sure the organizational budget encompasses all of the costs necessary to realize those mission priorities and initiatives that the organization is looking to achieve.
- Be conservative with the revenue estimates for the year; otherwise, you may find yourself assuming you have more funds to spend than you actually do. Base revenue targets on realistic expectations and only include reliable revenues in the budget.
- Identify early on all fixed costs that must be budgeted. Knowing these costs will help staff understand how much revenue is truly available for spending.
- Make sure total expenses are less than the total dependable revenue amounts. For organizations whose dependable revenues include single activities, such as an annual conference or fundraising event, consider the impact on the organization should these single activities get cancelled due to unforeseen circumstances. Decide how the budgeted expenses associated with these activities can be minimized to prevent major losses should the activities not occur.
- Budget for capital expenses separately from the operating budget. Costs in the capital budget will not only include furniture, equipment, or software purchases, but the budget might also include costs for making leasehold improvements, a building and equipment maintenance and replacement fund, a fund to support new program initiatives and experimental pilot programs, a human resource capacity building fund, and creating or increasing an operating reserve.
- Document how costs were derived by including notes within the budget itself. This will prove helpful if there is staff turnover during the year. If it’s necessary to have the notes separate from the budget in an accompanying budget narrative document, be sure to include a numbering sequence so anyone reading the narrative will understand which section of the budget is being referenced.
- Utilize the budget information to generate well-developed reports for the Board, stakeholders, members, and public. Consider different report structures depending on the audience. For example, the Board may prefer more detailed budget information broken down by program service area and including expected results. However, on the organization’s website or public documents, the organization may decide to present the budget information in a more easily understood format such as charts and/or graphs (i.e., pie graphs) that contain high-level information only.
- Implement a continuous process for reviewing budget-to-actual reports, tracking budgeted activities, and developing forecasts that show clearly how budgeted assumptions need adjusting and the impact of these adjustments on the organization’s bottom line.
Organizations that are most successful with budgeting are those that spend the time and effort to manage the budget process and generate a realistic and usable budget that is understood by the entire staff. These organizations will devise processes for reviewing budget assumptions, developing on-going budget reports, and monitoring organizational performance against budgeted outcomes.