Nonprofits are not run to make money. But they do make serious progress.
More than 1.5 million nonprofits are registered with the IRS. They contribute more than one trillion dollars to the economy. One-quarter of American adults volunteer with a nonprofit, helping their community on a number of issues.
You will make a difference as soon as you start a nonprofit. But you can make a real difference if you understand nonprofit budgeting.
However much money you have, you need to know how to allocate it into worthwhile projects. There are a few things you should understand in order to do that. Here is your quick guide.
Distinguish Nonprofit Budgeting From for-Profit Budgeting
You may have experience in budgeting and accounting for for-profit organizations. That will help you when budgeting for a non-profit. But you should know that there are substantial distinctions.
For-profit businesses are accountable to their investors. They have a lot more autonomy accordingly. As long as they are within the bounds of the law, they can take any measures they need to make money.
A nonprofit organization is accountable to anyone who donates to it. They must report how they use their funds, then they must hold to their word.
For-profit organizations distribute their profits to their investors. Nonprofit organizations must reinvest their profits into themselves. They can pay for full-time employees, but all profits must be built for the greater good in some way.
Nonprofits are exempt from paying taxes on their funds. This makes tax forms far easier. But they are liable to payroll taxes, just as for-profit groups are.
Break Down Your Budget Components
Your budget as a whole should allocate resources for all operations. You will make clear how these resources are allocated in several ways.
The nonprofit budget is actually two separate documents. The operating budget shows what the projected revenue of the year will be. It also logs the expenses of the entire organization.
All nonprofit funding streams should be defined. When possible, the budget should list the names of donors. This helps with donor management and transparency.
You should also distinguish your different expenses. You incur both program and overhead costs. List out every cost there is, even small ones.
While the operating budget looks at one year’s financial picture, the capital budget looks long-term. It projects what the future expenses and revenue will be, given the track record of ongoing and multi-year projects. This helps executives strategize.
Every budget component should correspond to a specific activity. If there is an unnecessary cost, it should be cut out. If there are leftover expenses, those should be used in some way.
Conceive the Budget Itself
The process of making the budget should begin early on. The board of directors should discuss, debate, and approve the budget before the start of the fiscal year.
Start by negotiating a timeline with the board. Make sure you have time to write it out, but you should leave enough time for them to discuss it.
Agree on what the budget template should look like. Have the board give you the budgeting resources that you need. This includes money set aside for professionals to look over your work.
Review all relevant financial documents, including last year’s operating budget. If there is any variance between actual revenues and projected ones, understand why that is the case.
Take time to do your research. Talk to the nonprofit’s accountants and external financial advisors.
Develop several drafts of your operating and capital budget documents. Ask other budgeting experts to oversee your work. Take their suggestions and make edits accordingly.
When you have a good final draft, deliver it to the board of directors. If you can sit in on their meetings, do so. Answer their questions and ask new ones about what the future of the company will look like.
Run Budget Reviews
Budget reviews are essential components of a nonprofit’s financial life. Because nonprofits must put all revenues back into the organization, budget reviews are check-ins to ensure that this is being done.
You should conduct a personal review every week. You should check to make sure all financial goals are being met, especially with funding. If your nonprofit is using too much money, it will run into trouble.
You should then conduct a teamwide review every month. All of you should look over the finances for the month.
You should examine the balance between budgeted and real-world expenses. Your team should take note of all discrepancies so future budget components fall in line.
You should also conduct quarterly reviews. This is when you review the entirety of the budget. You can track previous discrepancies and see if they line up with actual revenue streams.
An annual review loops other relevant parties into your nonprofit’s financial picture. You should tell the CEO how the budget stayed on course over the last year.
The two of you can talk about program outcomes. If something did not work, you can cut it or adjust its funding. Use their oversight to adjust the budget for next year.
Know About Nonprofits
Nonprofit budgeting is important to your nonprofit’s financial footprint. Whatever experience you have with for-profit budgeting, put that aside. You need to report how all of your funds are used to support your cause.
When making a budget, be as specific as possible. Distinguish between real and projected expenses and revenues.
Take time drafting out your budget. Set clear terms and expectations with the board of directors. Then run several budget reviews, including an annual one with the CEO.
Get the support you need to make a difference. The Charity CFO offers premium budgeting resources for nonprofits. Contact us today.