Nonprofit Budgeting: 3 Tips for a Strong Financial Plan

For many nonprofit teams, the beginning of a new year brings the excitement of a fresh start. Your organization may be excited to innovate with new technology, launch long-awaited programs and projects, or try novel approaches to donor engagement. Or, you might use the new year as an opportunity to avoid repeating past mistakes and learn from them instead.

To make the most of this fresh start, you’ll need the right tools on your side, and one of the most critical is a solid annual operating budget. Your nonprofit’s operating budget is its master financial plan for the whole year, meaning you’ll need to put a lot of thought into creating it to guide all of your spending and fundraising efforts.

In this guide, we’ll walk through three tips for creating an operating budget that provides a solid financial foundation for your nonprofit in the coming year. Let’s get started!

1. Review historical data

Since the future is uncertain, your operating budget will be made up of projections and estimates. However, you can make your predictions more accurate by basing them on financial records from past years—the best nonprofit strategies are data-driven, and budgeting is no exception!

Review the following information sources before you create your nonprofit’s annual budget:

• Financial statements: These documents summarize critical financial data to make it easier to draw actionable conclusions. Your statement of activities (which gives an overview of your nonprofit’s annual revenue, expenses, and change in net assets) and statement of functional expenses (which breaks down how your spending furthers your mission—more on this later) are particularly useful for budgeting.
• Budget vs. actual comparisons: These resources compare your actual spending and fundraising to the projections in your budget on a monthly or quarterly basis to show how accurate your projections were. Reviewing these documents from previous years can help you improve your estimates in your next budget
• Giving trends: To determine how giving trends may affect your budget, consider your nonprofit’s transaction data and information from the sector and economy at large. For example, your transaction data might show that individual giving to your nonprofit peaks at year-end and dies down during the summer. However, holistic economic activity like inflation, stock market movement, and changes in GDP may affect whether donors give similarly or differently to previous years, so stay up to date on that type of news as well.

To fine-tune the predictions in your budget even more, consider partnering with a fractional chief financial officer (CFO) with experience in the nonprofit sector. According to Jitasa, “Fractional CFOs…use specialized software to predict cash flows and visualize the possible outcomes of financial scenarios using graphs and dashboards.” Then, they’ll leverage this information to make strategic recommendations about your organization’s operating budget.

2. Categorize revenue by source

One key element that makes nonprofit finance unique—and complex—is that most nonprofits generate revenue from a wide variety of sources. This diversification boosts financial stability (since you’ll have a stronger safety net if unexpected circumstances arise) and allows your community to engage with your organization in various ways, increasing overall support.

To make accurate revenue projections in your nonprofit’s operating budget, organize that side of the document based on the five major categories of nonprofit revenue. Here is a quick breakdown of those categories and some funding sources that fall into each one:

• Individual donations: All sizes of monetary gifts (small, mid-level, major, and planned), event revenue, non-cash and in-kind donations
• Corporate philanthropy: Matching gifts, volunteer grants, sponsorships
• Earned income: Membership dues, merchandise sales, fees for services provided
• Investments: Treasury bills, CDs, stocks, bonds, cryptocurrency
• Grants: Federal and state government grants; private, public, and family foundation grants

Make sure all of your nonprofit’s financial information is organized this way—the revenue categories in your operating budget should line up with your bookkeeping system, financial statements, treasurer reports, and any other records or documents you create. This will make it easier to keep track of your fundraising and budget more accurately in the future.

3. Organize expenses by function

As mentioned previously, the best way to categorize your nonprofit’s expenses in your operating budget is by function—i.e., based on how each expenditure furthers your mission. Not only will this ensure consistency with your organization’s annual tax return, but it also provides deeper insight into your spending habits for improved efficiency and compliance.

The three functional expense categories are as follows:

• Program costs directly relate to your nonprofit’s mission-driven activities, so they vary widely from organization to organization. For example, an animal shelter may put the costs of food and veterinary care for rescue pets under its program expenses, while a museum might count expenditures related to creating and maintaining exhibits among its program costs.
• Administrative costs are necessary for your nonprofit to run day to day. This category includes spending on office equipment, utility bills, insurance, and staff compensation, among other operational needs.
• Fundraising costs are the upfront expenses associated with revenue-generating initiatives. These may include purchases of specialized software, event planning costs, marketing material creation, and fees paid to fundraising consultants.

You might also have heard the term “overhead costs” when discussing your nonprofit’s spending, possibly with a negative connotation. Overhead refers to your administrative and fundraising costs combined, which are essential for your organization to run. However, if you decide that you need to reduce your nonprofit’s spending during the budgeting process, try to find overhead expenses that you can reasonably cut (such as unused software subscriptions or unnecessary usage of utilities) before taking funding away from your programs.

Additionally, make sure your nonprofit’s total budgeted revenue for the year exceeds its total projected expenses, since having reserve funds increases financial security. Infinite Giving’s nonprofit cash management guide recommends keeping reserve funds in FDIC-insured brokerage accounts and investing in low-risk vehicles like CDs and treasury bills to safely and sustainably grow your nonprofit’s cash reserves.

Nonprofit budgeting for effective financial planning

While you’ll create your nonprofit’s operating budget from scratch once a year, effective budgeting isn’t a set-it-and-forget-it process. Instead, check in with your budget at least once a month using tools like cash flow statements and the aforementioned budget vs. actual comparisons. This way, your organization can monitor its progress with spending and fundraising and make adjustments as needed for more effective financial management throughout the year.

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This article was written by Jon Osterburg, a leader at Jitasa who has spent the last nine years helping more than 100 nonprofits around the world with their finances. Jitasa is an accounting firm that offers bookkeeping and accounting services to not for profit organizations.