Creating a Nonprofit Operating Budget: 4 Best Practices

As I hope you now see, a lot goes into determining a nonprofit operating budget. While drafting yours, remain mission-focused, involve your stakeholders, and use Keela’s operating budget template. However, nonprofit revenue often comes from other forms of support such as donations, grants, and different types of contributions.

• For example, if your nonprofit relies heavily on annual fundraising events, consider historical data and any potential shifts in donor behavior.
• If that has not been your practice we urge you to gather some accurate information by completing a timekeeping report or adding time reporting to payroll or database records.
• For a detailed breakdown on planning these strategies, see How Can You Write a Business Plan for a Charity Nonprofit in 9 Steps?.
• Competitive salaries not only attract experienced professionals but also help maintain operational stability in a charity nonprofit operating costs structure.
• Keela is a comprehensive platform that gives you powerful, intelligent tools to manage your donors, mobilize your volunteers, market your nonprofit, and raise more money.

Revenue & Expenses: What to Budget For

• Reviewing the organization’s past financial performance is another important step in creating a nonprofit budget.
• This reactive approach leaves organizations vulnerable to economic shifts, grant expirations, and donor fatigue.
• By the end, you’ll have the knowledge and tools to build a reliable financial plan with confidence that balances financial constraints with your nonprofit’s ability to carry out its mission.
• Every successful budget for non-profit organizations balances mission impact with financial stability.
• These two cost centers are important components of understanding true costs and are created in parallel with the programs.
• It is most useful for nonprofits that want to avoid unnecessary expenditures or when they need to adapt to significant changes in their operating environment.

Understanding nonprofit budgeting is only one part of the equation; accurate accounting practices are equally essential. There are many resources around accounting services for nonprofit organizations best practices including the Council of Nonprofits and AAFCPAs. Once the budget has been created, it is important to monitor actual expenses and income on a regular basis. This will allow you to make adjustments as needed to ensure that the organization remains on track to meet its financial goals.

Identify the organization’s major sources of income and expenses

• It outlines the expected income and expenses for a specific period, often a fiscal year, and serves as a guiding light for fiscal responsibility.
• Regularly monitor how aligned your projected budget is with what you’re actually experiencing, and make tweaks as you need to.
• It’s meant to help you manage your cash flow so that you can run smoothly while achieving the goals you have set out for your organization.
• Nonprofit organizations, driven by their missions to create positive change, often operate under financial constraints.
• Ultimately, remember that your budget should categorize revenue by different funding sources and your expenses by program vs. overhead costs.
• Although considering natural expenses is helpful during the planning process, your final budget should use functional expense categorization to match your financial reports.
• Here’s a comprehensive, step-by-step guide to building a budget that supports your nonprofit’s mission effectively.

After multiplying this result by 100 and tacking on a percent symbol, the nonprofit understands its operating margin is 4%. The result of the operating margin calculation will be a decimal representing the percentage of profits yielded from operations. Simply multiply the decimal by 100 to get a clean percentage that represents your operating margin. Regularly https://greatercollinwood.org/main-benefits-of-accounting-services-for-nonprofit-organizations/ monitor how aligned your projected budget is with what you’re actually experiencing, and make tweaks as you need to.

• A nonprofit operating budget breaks down the annual projected revenue and expenses for the organization.
• While no two nonprofits are exactly alike, there are some best practices that all organizations should use when building their annual operating budgets.
• At this stage, it’s also important to assign roles to those involved in budget management.
• These costs encompass the planning, pilot testing, and scaling of community programs.
• Fund your mission and transform your impact by reading The Ultimate Guide to Nonprofit Fundraising.
• Creating a sound budget, and then sticking to it, is the cornerstone of health and sustainability for nonprofit organizations in the Colorado Springs area.
• Creating a nonprofit budget can feel overwhelming, but breaking it into manageable steps can simplify the process and ensure accuracy.

Equipment, software, and supplies

Consider the impact of any grants or sponsorships, including both new ones you may win and current ones that may shrink or dry up. Your annual unrestricted surplus should be sufficient to meet debt obligations, fund depreciation, and add to operating reserves. AAFCPAs recommends a 3-5% surplus operating budget each year, and four to six months of expenses in your operating reserves. Donors and partners like to see how many dollars are spent on the nonprofit’s mission versus executing the mission. List expenses in the high-level categories of staff, contractors, occupancy, and support expenses (which include all other program and operating expenses).

We recommend setting aside at least 5-10% of your annual budget for emergencies. If you’re managing a multiple six- or seven-figure budget, asking a financial expert for help is always a good idea. Nonprofits are recommended to have general liability (premise), commercial automobile (non-owned/hired), and directors and officers (D&O) liability coverages. If you are still unsure of how to develop a budget, you can consult with a financial advisor or accountant. They will be able to help you create a budget that meets your needs and ensures that your nonprofit is financially stable. If you are comfortable working with numbers and have a good understanding of your organization’s finances, you may find that zero-based budgeting is not as difficult as it initially seems.

For example, your programs may have multiple goals, such as improving the quality of aid while also reaching more beneficiaries. Your budget is a recipe for financial health over the forthcoming year, but don’t ignore the health status you expect when closing the current year. Finally, a realistic timeline for budget preparation should be established, ensuring enough time for review and adjustments before final approval. At this stage, it’s also important to assign roles to those involved in budget management. It’s important to have all of your financial reports and receipts in order so that you’re ready for a state or IRS tax audit process. Nonprofit organizations have a number of exemptions when it comes to tax but will still need to file tax returns with the IRS and your home-state tax department.