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September 26, 2023

Nonprofit Budgeting: Understand the Basics

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Today, 1.5 million nonprofit organizations (NPOs) operate in the United States, and more than 10% of the American workforce is involved in this industry. The activities of nonprofit firms are often tied to the generosity of their donors, in terms of economic support, to keep them running smoothly. Stable capital inflow is the key to the success of such enterprises since all programs require consistent funding. But not everyone realizes the importance of budgeting for nonprofits.

The lack of precise cash flow management is one of the main reasons for the failure of companies, especially nonprofit ones. The need to win donors’ trust and sound financial management are the bases of a reliable relationship. Let’s discuss why budgeting for nonprofit organizations is essential and how to organize this process correctly.

Defining the budget for the NPO

The NPO budget is an economic statement that outlines how your company intends to spend capital. It’s not just about setting aims; it’s about figuring out how to achieve them. All plans include the following elements:

  • Sources of income.
  • Operating expenditures.

Controlling these financial aspects provides some tools to comprehend how optimal to utilize your resources. Your NPO budget should be a flexible plan that may change depending on the circumstances. Be prepared that sometimes you may get an increase in income or face unplanned expenses.

At the end of each reporting period, the company must compare its actual performance with the expected numbers.

How to make the NPO budget?

An accountant may utilize a few methods of budget management for nonprofit enterprises. Many templates are available on the Internet, or you may make your own. In some situations, you can get by with a straightforward spreadsheet. Let’s analyze how to build an economic plan.

Identify the participants in the budget process

Selecting the right people when forming a budget committee is crucial in ensuring the smoothness of economic planning. Although your nonprofit firm may not have all of these positions, you can expect the following professionals to be involved in budgeting for nonprofits:

  • treasurer,
  • head of the financial team,
  • other economic experts
  • department heads,
  • senior staff,
  • outside consultants.

Suppose your nonprofit firm has people who have previously taken part in such processes or, perhaps, were involved in forming commercial enterprise plans. In that case, we recommend adding them to the budget committee.

Define goals

To perform financial estimations, you must understand what you want to achieve. It is essential to ask yourself some questions:

  • What are we planning to do next year?
  • How are we going to achieve the goals?
  • What obstacles may be encountered along the way?
  • What to do if there is a shortage/surplus of capital?

If multiple teams are working on budgeting, make sure each group clearly states what they need to be successful next year.

Choose the working algorithm

When calculating the nonprofit budget, most people choose one of two models.

The first system offers to define all expenses during the year.

Once you comprehend how much you must spend, you may begin fundraising programs and campaigns to reach and exceed that sum. It is an excellent option for NPOs with a project in mind who decide to evaluate how much capital they need.

The second approach is the opposite of the first. Instead of calculating spending and developing a fundraising tactic, figure out how much funds you may raise this year and plan your costs so they don’t exceed that sum.

Estimate the NPO capital flow

Now it’s time to evaluate all your income and costs. You need to list all the sources from which you can receive income and each thing you plan to spend capital on. When creating financial forecasts, you should utilize the next data:

  • Financial statements for past periods.
  • Information from sponsors.
  • Estimated operating costs.
  • The expenditures of implemented programs.
  • Costs to ensure cooperation with contractors, etc.

In financial planning, it is crucial to have accurate and precise data to guarantee correct nonprofit accounting. After the document is ready, it must be approved by the board of directors.

Main groups of NPO income and costs

When compiling a personal budget, we concentrate more on spending than income. Most people have several sources of earnings that remain the same over time. However, since NPOs have many income categories, their plans must be both income and spending oriented. Let’s discuss each element of a financial plan in more detail.

Expected earnings

Income is the capital your NPO receives from standard business operations. Since NPO funding is supple, it is vital to have different channels of earnings:

  • Membership fees: participation in your NPO could  be on a subscription basis, as fees are the fundamental source of income.
  • Events: you can sell tickets for the most exciting events.
  • Merchandise: you may partner with online retailers to sell your branded products or showcase event merchandise.
  • Donations: even minimal contributions accumulate over time. You will receive a stable capital inflow if you turn one-time donors into regular sponsors.
  • Grants: there are many opportunities to obtain grants, and applying to bodies that offer economic aid is a must.

You can employ the discount accounting method to forecast earnings. To do this, you should define the dollar sum you plan to obtain from each capital channel and then multiply this sum by the probability percentage of fundraising. Consider this example: you have applied for a $15,000 grant and estimate the probability of obtaining it at 70%. It means the projected revenue is $10,500.

Cost analysis

Expenditures cover everything worth your nonprofit capital; whether they are one-time or recurring costs. Some groups of typical non-business costs include:

  • Direct costs related to a specific project include hiring additional staff to organize events, ordering supplies to implement public works programs, etc.
  • Capital expenditure on real estate or a car benefits the company more than one budget period.
  • Overhead costs may not be specific to a particular program but must be completed. When planning, you can miss such things as postage, telephone and Internet costs, and the maintenance of the management staff.

Although the budget of NPO may look different, the Better Business Bureau advises spending no more than 35% on overheads and no less than 65% on your projects.

Kinds of NPO budgets

Before you begin making the NPO budget, you should learn there are different categories of documents, each of which solves specific tasks. You may form an incremental budget based on historical data or plan from scratch. Knowing what kind of estimates you need lets you ask yourself the proper questions to collect the necessary information to compile the most accurate document:

  • Operational budget: this is one of the more popular documents displaying your annual projected earnings and operating costs. We recommend you start with the proposed plan and control the necessary costs throughout the year.
  • Capital budget: this document contains numbers related to the enterprise’s long-term goals, such as construction.
  • Project budget: such a statement offers an overview of capital inflows and outflows to implement a particular project. You can create plans for specific activities, including raising capital or implementing a marketing campaign.
  • Forecast of capital movements: these plans contain predictions that allow you to determine how much capital you have in the bank at a given moment. Companies often rely on these documents when forecasting their income and costs.

There is no right way to launch budgeting for nonprofits; you must find a more suitable solution. The most important thing is to keep the sequence after you choose one option. Otherwise, it will be challenging to compare plans for various periods.

Nonprofit Budgeting: Understand the Basics

Features of the work for the NPO budget group

All board members should be aware of the aims of the budget and their responsibility to create a precise economic plan that will guarantee the firm’s stability.

The board must begin reviewing the budget no later than two months before the end of the financial year so that the specialists have time to approve the new plan before the beginning of the next period.

During the first consultation, the proficients of the budget group agree on economic aims. To do this, you need to define the priority activities of the company. It is also the optimal moment to analyze current earnings and costs against plan numbers.

The second budget committee consultation calculates the company’s future income and expenditures. Specialists must calculate the costs of implementing planned projects and make forecasts regarding capital inflows based on ongoing fundraising projects.

The next step is to have the draft budget ready and review it to guarantee it aligns with programmatic and organizational objectives. After making the last adjustments, the project’s final approval takes place.

The importance of budgeting for nonprofits

Accurate financial estimates are a critical element of any business plan. When you spend time and energy developing an accurate and consistent budget that meets your needs, you may look forward to clear benefits:

  • Get the job done: efficient economic calculations allow you to focus on what matters most. The more resources you spend on achieving the goal, the higher the chances of success.
  • Develop cost-effectively: a financial plan ensures sustainable growth without the risk that spending will exceed capital inflows. Running an enterprise without a budget is like driving in the dark with your headlights off because you don’t comprehend where you’re going.
  • Improve collaboration with sponsors: potential donors are often reluctant to partner with wasteful firms. They want to be sure you are spending their capital wisely and that their contributions will help people. In other words, having a clear financial blueprint improves relationships with sponsors.

Let’s say you lead the NPO that makes public parks more inviting and relaxing. In the coming year, you planned to hold several events, including a spring marathon, a summer dog competition, and a fall fair. Still, after doing all the calculations, you determined there was only enough funding to implement one major project. A pre-drawn budget will help determine priority development areas.

Recommendations on how to create the NPO financial plan

Compiling an annual budget can be long and tedious, but these calculations are necessary. The numbers don’t lie – you need capital to get things done. There are a few tactics you can adopt to improve the current system and make such an task as easy as possible:

  • The budget must be flexible: no financial plan will be 100% accurate. When drafting the document, keep in mind the numbers you enter are your optimal guesses, but a lot can go wrong, and the budget must be adjusted.
  • Teamwork: no director of a nonprofit company can work alone, especially in budgeting. Delegate as much authority as possible to development staff, project managers, and budget committee members.
  • Analyze your gained numbers: use numbers, not intuition, when developing a financial plan. Historical data is a reliable basis that needs to be explored when calculating forecast values.

Budget planning is too essential an undertaking to rush and make errors. Listen to our advice and adopt optimal practices to master the procedure quickly.

Final words

Precise budgeting is a crucial task for the NPO. You must be sure you have enough capital to run and support important programs. Also, knowing how much it will cost before committing is important. Qualified BooksTime accountants understand what to look for when budgeting to avoid unnecessary costs and achieve company goals.

If you need this, schedule a call with the company today. Our experts will happily analyze how they can improve your financial experience!

This article is not intended to provide tax, legal, or investment advice, and BooksTime does not provide any services in these areas. This material has been prepared for informational purposes only, and should not be relied upon for tax, legal, or investment purposes. These topics are complex and constantly changing. The information presented here may be incomplete or out of date. Be sure to consult a relevant professional. BooksTime is not responsible for your compliance or noncompliance with any laws or regulations.

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Author: Charles Lutwidge

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