10 Steps to Creating an Effective Nonprofit Budget

Imagine you’re preparing for a long road trip across unfamiliar terrain. You wouldn’t set out without a map, a plan for stops, and a clear idea of the resources you need—fuel, food, and funds—to reach your destination safely and efficiently.

Budgeting for a nonprofit organization is much like planning that road trip. Without a solid financial plan, the journey toward fulfilling your mission can quickly veer off course, jeopardizing the impact you want to create.

In this blog post, you’ll learn the essential steps for creating an effective nonprofit budget. We’ll explore the purpose of budgeting, the critical questions to ask during the process, and the factors to consider to ensure financial stability and mission alignment. By the end, you’ll have a clearer understanding of how to build a strategic roadmap that propels your organization toward success.

What Is the Purpose of a Budget for Nonprofits?

At its core, your budget is a list of expected revenue and expenses for a set timeframe. Your budget allocates your resources so you can maximize your impact while maintaining transparency and accountability to your donors, grantmakers, and the communities you serve. 

A well-crafted budget provides a financial roadmap for achieving success and serves as a strategic tool for planning, decision-making, and measuring performance. Budgets often need to be adjusted throughout the year due to unforeseen changes, but they still are a great way to measure how successful a year is, and to highlight areas of need.

What Factors Should You Consider When Budgeting?

While the idea of a budget is simple—and some budgets can be—it takes a good amount of preparation to create a tool that accurately forecasts your goals for the year. If you don’t take into account trends or new initiatives, for example, your budget becomes unhelpful at best and at worst, creates issues with cash flow.

Here are a few questions to ask your leadership and finance team as you start building your next budget:

• Has our mission remained the same? Have our goals shifted this year?
• What were the issues with the last budget? Did we have to adjust, and if so, why?
• Have we experienced any funding losses, or do we expect any major changes?
• How are our operating reserves? Are they adequate for what we expect from the coming year, or should we add to them?
• Are there any new initiatives we want to pursue this year and if so, what do we expect the expenses and revenue to be?
• What are the historical trends for our revenue and demand? Do we expect anything different based on what’s happening in our community today?

Gathering this information before the budget process begins will help you create a more realistic and accurate budget.

Steps to Creating an Effective Nonprofit Budget

Creating an effective nonprofit budget requires thoughtful preparation and collaboration. By combining historical financial data, realistic projections, and strategic alignment with organizational goals, your budget can become a powerful tool for sustainable impact.

1. Evaluate Your Financial Health

Start your budget process by understanding where you are and where you’ve been. Review past financial statements, cash flow, and any existing debts to get a baseline for your budgeting process. Are you a third of the way through paying for a piece of equipment? Have your transportation costs increased 5% each year for the past three years? Always use historical data and realistic projections to avoid guessing.

2. Set Clear Financial Goals

Work with your leadership or refer to your organization’s strategic plan to understand the larger organizational goals. Translate your organization’s goals into clear financial objectives. If your organization wants to expand mid-level giving, for example, understand what your development team needs for campaigns and what the expected revenue will be so it can be allocated appropriately.

3. Estimate Your Revenue

List every way revenue comes into your organization. This may include donations, grants, fundraising events, government funding, and even small affiliate programs through your local grocery store. Again, it’s important to review how these revenue streams have performed in the past and understand how they might change this year. Having this clear delineation will also highlight if you are relying too heavily on one revenue source, or several connected channels, like federal and state grants.

4. Understand Your Cash Flow

Even if your budget shows a surplus, timing matters. Look at your historical financial statements to get a sense of your cash flow. Know when you expect fundraising campaigns to hit, grant payments to be awarded, and when you expect major expenses. Aligning your revenue and expenses during the budget process helps you avoid cash flow issues throughout the year.

5. Calculate Expenses

Next, categorize and calculate all anticipated expenses. Common categories include program and marketing costs, administrative expenses, and personnel. Be sure to account for both fixed and variable costs. Fixed costs are expected and the same amount every month or year, like your software subscriptions or mortgage. A variable cost changes each time or arrives at irregular intervals, like program materials and postage for a campaign.

6. Create a Budget Template

Using a budget template to organize your revenue and expenses means you never have to start from scratch. They also help you maintain consistency and transparency. Fund accounting systems like Blackbaud Financial Edge NXT® often give you the ability to save a previous budget as a template and export it to Excel for easy distribution.

7. Incorporate Budget Scenarios

Begin by creating multiple versions of the budget based on different assumptions, such as fluctuations in donor contributions or grant funding. Use tools like spreadsheets or fund accounting systems with scenario features, such as Financial Edge NXT, to forecast these scenarios effectively. Analyze and compare the results to identify risks and opportunities and refine the budget drafts accordingly. This process ensures transparency and allows for informed decision-making across the organization.

8. Gather Departmental Input

To ensure your budget aligns with organizational needs, gather input from each department. Provide them with a standardized budget template to simplify the process and encourage consistency. Ask departments to share their projections for revenue, planned expenditures, and anticipated changes for the upcoming year. This collaborative approach highlights emerging needs, ensures transparency, and avoids oversights during the budgeting process.

9. Review and Approve the Budget

Once the budget is drafted, review it with key stakeholders, including board members and department heads. Their input can provide valuable insights and ensure the budget aligns with organizational priorities. Schedule a budget review meeting with leadership to discuss any adjustments. After review, seek formal approval from the board.

10. Implement and Monitor the Budget

Your budget should be a dynamic tool to help guide your organization throughout the year. Compare actual revenue and expenses against the budget to identify any discrepancies. Monitoring your budget regularly so you can adjust as needed and make sure you are on track to meet your financial goals. Set monthly check-ins to review financial performance and make necessary adjustments.

Streamline Your Budgeting Process with Fund Accounting Software

Creating an effective nonprofit budget is a dynamic process that requires careful planning and ongoing management. By leveraging fund accounting software like Financial Edge NXT, nonprofits can streamline their budgeting process and enhance their financial management operations.

Fund accounting software allows organizations to create budgets from scratch or use existing templates, import budgets from Microsoft Excel, and use scenarios for effective comparison and analysis. Additionally, features like loading accounts, distributing budgets, and adding annotations ensure transparency and accountability within the budgeting workflow. By incorporating these tools and best practices into your budget lifecycle, finance professionals can ensure their organization remains financially healthy and mission focused. 

Ready to see how fund accounting software can help you create better, more accurate budgets? Check out our on-demand webinar, 10 Ways Blackbaud Makes Budgeting Easier.