How to Build a Better Nonprofit Budget in Less Time and with Less Stress

Like a good recipe, your nonprofit budget requires high-quality ingredients, easy-to-follow steps, and a knowledgeable cook or two to put it together. Without those, it can be a struggle just to make a plate of spaghetti. But when you have all the pieces—accurate data, a clear process, and a finance team to put it together—you can make a three-course meal look easy.

Here are a few simple steps to help you create a solid budget that helps your organization allocate resources effectively and makes your budgeting process easier.

Always Start with the Mission in Mind

Any good budgeting process should start with your organization’s mission and strategic plan. A clear understanding of your core mission and short-term and long-term goals aligns the budget and financial decisions with the overall direction of the organization. You prioritize programs and initiatives that help you achieve meaningful impact.

Having your organization’s mission and short- and long-term goals as a guide will also allow for flexibility in the budget. Organizations should view the budget as a dynamic tool as opposed to something set in stone. Changes in the economy or industry may require an adjustment to the budget, but with your mission at the center, you are still positioned to support your community no matter the changes.

Revenue Before Expenses

Before your organization can figure out the expense side of the budget, you should first start with the inflows and available resources. You have to know what is available to the organization before you can line out what to spend.

Create a realistic revenue budget independently of the expense budget to avoid inadvertently allowing the expenses to influence revenue decisions. Review funding history, including donations, grants, sponsorships, or program income, to determine which sources can be repeated for the budget year, what areas have room for growth, and where diversification is needed.

And remember, just because you are a nonprofit organization, you can still have revenue that exceeds your budget. That allows you to do more to fulfill your mission.

Review Expenses Independently

Budgeting by department helps break down the budget into manageable pieces. Work with the heads of each department to analyze expense history, review contracts for any automatic expense increases, and evaluate the strategic plan for any additional expenses to include.

In general, there are two types of expenses you should consider when creating the budget: fixed and variable. Fixed expenses do not increase or decrease based on the programs the organization provides. These are set costs like headquarters rent, insurance, and administrative salaries. Variable expenses will fluctuate based on programs and decisions the organization makes. These expenses can include program staff, professional fees, and supplies. Consider changes in programs, such as potential growth in demand, when budgeting for variable expenses and adjust accordingly.

Compliance and Spend Down Review

Once expenses are set, take a step back and make sure that everything for the year has been allocated properly. Many of your organizations have grants or funds with restricted or required spending, and doing a review of these spending requirements is key after you have a draft budget. No organization wants to give money back to a funder, so you want to ensure everything is in the proper bucket. For many organizations, this can be a complex and cumbersome process and having the right fund or grant accounting tool can go a long way. These tools allow you to quickly glance at spending reports and easily see if your organization is on track. 

Review and Communicate and Review

Be sure to get your board’s buy-in and approval on the final budget. This allows for organizational transparency and for board members to maintain their fiduciary responsibility. Once reviewed and approved, the budget is ready to be implemented. Distribute it back to the budget owners and make sure your fund accounting system reflects any last-minute changes.

Set up time to periodically compare actual results to the budget and note any variances. As those variances occur, dig into them to truly understand what is going on. The story will help determine if the variance is due to an added transaction not originally included, timing of the transaction is off from the expectation, or if there is an issue that needs to be addressed. This variance analysis will help you adjust the current year’s budget and account for any changes in the next year’s budget.

The budget is a powerful guide to allocating resources to fulfill the short- and long-term goals of your organization. Prepare the budget in small chunks, review it consistently, and build a budgeting process to set the organization up to effectively utilize resources to fulfill the mission.

To learn more about how to streamline your budgeting process, check out our webinar Budgeting 101: How to Budget and Plan for Success at Your Nonprofit (CPE Credit-Eligible).

Forvis Senior Manager Seth Hopkins contributed to this article.