Creating a Nonprofit Budget: 4 Steps to Get Started
Starting a new nonprofit involves a variety of considerations, from defining your mission statement to taking all of the necessary steps to receive 501(c)(3) status. Arguably the most important question to take into account, however, is how your organization will bring in and allocate funding for its operations and programs.
The answer lies in creating a nonprofit operating budget. Jitasa’s nonprofit budgeting guide defines this financial tool as “a planning document used to predict expenses and allocate resources for your organization. It details both the costs that your organization will incur as well as the revenue you expect to receive over a set period of time [usually one year].”
In this guide, we’ll walk through these four essential steps to create a budget for your new nonprofit:
Set Realistic, Relevant Goals
Organize Revenue by Source
Categorize Expenses by Function
Check in With Your Budget Regularly
Every nonprofit is different, so you’ll need to adapt these steps to your organization’s unique situation. You may be working by yourself with very little funding, or you might already have some reliable revenue sources and other staff members you can consult with as you create your budget. Either way, these financial planning tips will guide your operations and initiatives as your nonprofit gets up and running. Let’s get started!
1. Set Realistic, Relevant Goals
If it isn’t your first time creating a budget for your nonprofit, looking back at past budgets can help you get a sense of what you can expect this year in terms of revenue and expenses. If it is your first time, you won’t have that data to rely on to set financial goals for the year.
Instead, ask yourself the following questions to understand your nonprofit’s financial situation and needs:
What are my organization’s mission statement, values, and vision?
What are my mission-related priorities for this year?
What are the most important expenses associated with these priorities and with my nonprofit’s general operations?
How much funding do I currently have on hand?
How much additional revenue do I expect to bring in this year, and where will it come from?
Are there any untapped opportunities for revenue generation that my nonprofit could incorporate into its strategy?
Based on your answers to these questions, set overarching goals for your organization’s spending and revenue generation. Be realistic about your fundraising and service delivery capabilities when developing these goals, and know that they may shift if unexpected circumstances arise, such as additional expenses due to an emergency or a funding source falling through.
2. Organize Revenue by Source
Nearly all budgets have two sides to them: revenue and expenses. Your nonprofit can create either side first—some organizations find it more helpful to get a sense of the funding they have to work with before allocating it, while others prefer to lay out costs first (especially fixed ones) and then determine how much revenue they’ll need to cover those expenses.
Regardless of which approach you take, it’s most effective to organize the revenue side of your budget by source. Nonprofits typically have multiple sources in their funding model, and tracking them separately helps you better understand where your funds come from.
The major types of nonprofit revenue include:
Individual donations. These typically make up the bulk of nonprofit funding and include small, mid-level, and major gifts, as well as event revenue and in-kind contributions.
Corporate philanthropy. This category includes all donations to your organization from for-profit businesses. According to Double the Donation, these contributions may come in the form of employer matching gifts, volunteer grants, event sponsorships, or various other giving initiatives.
Earned income. Although this revenue stream isn’t commonly associated with nonprofits, your organization can earn income through memberships, branded merchandise sales, or fees for services provided.
Grants. Contrary to popular belief, securing grants is not out of the question for new nonprofits! You just need to look for grants that align closely with your organization’s priorities and that are open to smaller organizations.
A common misconception about nonprofit budgeting is that because nonprofits by definition can’t turn a profit, their budgets have to break even every year. In reality, if you can budget for a revenue surplus, you should! This way, you can start a savings account to keep your organization afloat in case of emergency and set yourself up for long-term growth.
3. Categorize Expenses by Function
On the expense side of your budget, the most effective way to organize costs is based on how the spending furthers your nonprofit’s mission. These functional expense categories, as they’re called, align with financial reporting requirements for nonprofits to keep all of your documents consistent.
The three types of functional expenses are as follows:
Program costs are directly related to your organization’s mission, so they’re different for every nonprofit. For example, an animal shelter would categorize spending on pet food, toys, and medical supplies under its program costs.
Administrative costs are necessary to run your organization and include expenses like staff salaries, utility bills, and office equipment.
Fundraising costs are the upfront expenses associated with bringing in contributions, such as creating nonprofit marketing materials, planning events, and purchasing specialized software like online donation processors and matching gift tools.
You may have also heard the term “overhead expenses,” which refers to your organization’s administrative and fundraising costs combined. While the general standard is that nonprofits should spend at least 65% of their funding on their programs and no more than 35% on overhead, this breakdown looks different for every organization.
Your overhead costs will likely comprise more of your budget for the first few years of your nonprofit’s existence, which is totally normal! Treat the 65/35 “rule” as a guideline to reduce overhead expenses before taking funding away from your programs if you need to cut costs.
4. Check in With Your Budget Regularly
Effective nonprofit budgeting isn’t a one-and-done activity. Instead, your budget should serve as a guide to keep your organization’s finances on track throughout the whole year.
At least once a month, sit down with your nonprofit’s board and leadership to compare your actual revenue and expenses from the past month to the predictions in your budget. If you met or exceeded your fundraising expectations and kept your spending in check, determine what went well so you can build on those strategies for the rest of the year. If you fell short of funding totals or incurred unexpected expenses, evaluate why that happened and how you can improve.
Then, look ahead to next month and proactively make any necessary adjustments. For example, if you were hoping to receive grant funding in September but got the rejection letter in August, go ahead and remove that revenue from your budget. This way, you can figure out how to make up the difference more quickly and continue covering your expenses.
The first budget you create for your organization will almost certainly be the most challenging. However, if you do it well, it will become a vital resource—not only to keep your spending and fundraising on track for your nonprofit’s first year, but also to inform future budgets. This way, even as your organization grows and its financial situation becomes more complex, you’ll be able to budget more efficiently and effectively each year.