10 Considerations for Creating a Budgeting Process

Your budget is your organizational GPS. It tells your nonprofit where you want to go and how you plan to get there. But as your organization grows and changes, you also need to update your financial direction. That includes both the budget and the process for creating it.

In addition to reviewing and updating your nonprofit operating budget each year, your financial team should also regularly evaluate your process for creating that document.

What Does a Nonprofit Budgeting Process Include?

At its most basic, a good budgeting workflow is a balance of the people who can make informed decisions, technology to manage the data, and documented processes for redundancy. For brand new or straightforward organizations, that can be your CFO, your Executive Director, and an Excel spreadsheet. If you are part of a complex organization with a large budget and multiple revenue streams or restricted funds, the process may be more complicated and require a robust fund accounting system.

People: Start by engaging those who are responsible for adhering to the budget and implementing the organization’s objectives in creating the budget. Review your strategic plan so everyone is familiar with the organization’s larger goals.

Data and Technology: Understand the information you have available and where to find it. Do you need to pull reports and CSV files from several different systems to get a holistic view of your income streams and expenses? It’s also helpful to identify your reporting capabilities so you know how you want to present the budget when it’s complete.

Documented Processes: Your annual budgeting process should be documented with tasks, responsibility assignments, and clearly stated deadlines. A good budgeting process also states that income is budgeted before expenses and incorporates strategic planning initiatives. Update your documentation each time you review your budgeting process.

What to Consider When Reviewing and Revising Your Budgeting Process:

• Involve relevant team members: Organization-wide cooperation is critical to a smooth budgeting process. Include members of your leadership team who develop the organizational goals, bring in revenue, and need to stick to the budget created for them.
• Budget for income first: Create a realistic projection of reliable income. Include expected grants, donations, events, fees for services, and any other revenue streams. If your expenses are more than your income, you know you need to increase your income or decrease your expenses.
• Understand revenue source(s): Budgeting is a form of risk management, and a healthy mix of diverse revenue streams will help keep the organization stable should a revenue source go away. Also be aware of restricted versus unrestricted funds. Restricted funds can be a great resource to provide support to your organization’s programs, such as a capital campaign or scholarship fund. However, you need to bring in enough unrestricted revenue to cover the operational expenses to support those programs.
• Understand the budget’s relationship to the organization’s short- and long-range goals: The budget should be consistent with the organization’s stated goals and missions. Make sure all stakeholders are aware of the organization’s strategic plan as they work on and review the budget.
• Budget for capital in addition to operations: A capital budget can run for several years, but a good strategy should be in place to ensure your organization meets non-operating goals as well.
• Include notes when appropriate: Don’t take for granted that key stakeholders fully understand underlying budget assumptions. Explain how you got these numbers but be as concise as possible.
• Provide the appropriate tools: Find a budging tool that works for your organization, including opportunities to group programs together by impact area and clear reporting features to help you stay on track. Make sure those helping you put the budget together are trained in how best to use the tool for this purpose. That includes where information comes from and the types of reports you need for the final budget.
• Ensure the budget is presentable: You have worked hard on the budget. Make sure others can understand it. Break out information and use charts to visualize bigger picture concepts, such as changes in spending categories over time.
• Set realistic timelines: Everyone from your intern to your Board president wears a variety of hats, both for your organization and outside of it. Give your team members plenty of time for review and feedback prior to sharing with the Board. After your finance committee has reviewed the budget draft, provide it to the Board in advance of the approval meeting to give them time to review it. Be sure to include the goals and supporting information with the Board in advance to help facilitate a constructive conversation.
• Review, approve, and revise: Once approved, communicate the budget and your larger goals with your staff. Continue to monitor actual income and expenses and compare them to the budget. Tweak the budget as needed but follow your documented approval process for significant budget changes.

When Your Budget Changes Between Reviews

Once you have a solid budget, you can begin working on making it a reality through cash flow projections, fundraising goals, and staff forecasting. But like all best laid plans, situations change. A lynchpin grant doesn’t come through, or a generous donor makes a large contribution out of the blue. When your financial numbers shift unexpectedly, it can cause your financial team to scramble. Center on your mission and short-term goals to refocus your budget for immediate cashflow. Then go back to your documented process and reassess your new situation.

Want more tips on what to do if an unforeseen event dismantles your budget? Check out our downloadable tip sheet, “What to Do When Your Budget Gets Blindsides: Eight Tips to Rally and Reset After the Unexpected Happens.”

This blog post was originally posted March 2017 and updated August 2022.