How to create your nonprofit’s first budget (even with no money)!
Do you want to know the 1 thing to help you raise money as a nonprofit?
Create a budget.
It seems counterintuitive, doesn’t it? It seems weird that adding numbers to a document can be the key piece that influences your ability to make money. The fact is, too many people underestimate the importance of developing a budget. They rush to raise money without thinking about what they’re trying to accomplish and what it will cost. If you want to increase your funding, always start with your budget.
But why is it so hard for people to write a budget for their nonprofits? If it really is the key to successful fundraising then why do so many people struggle with it or avoid it all together?
I’m convinced that new nonprofit founders don’t truly understand what it means to create a budget. So many approach budgeting the wrong way. They think that a budget is meant to restrict your spending. Or, they may think that they can only budget based on what they currently have in the bank (which is often not much), and not on what they need. Both of those are complete myths. In this post, I’m going to share how to approach budgeting the right way, and give you an easy strategy to create your first budget.
What is a budget?
First, I want to take away a lot of the misconceptions around the budgeting process. A budget is simply a planning tool that identifies how much you need to spend and raise during a certain time period. Nonprofits typically operate off an annual budget that aligns with their fiscal year (their financial year), which you also establish with the IRS when you apply for tax-exempt status.
If you need to know how much it costs to run your programs for the year, you create a budget to plan out what you think it will cost, and then track your spending along the way.
A budget has two major sections: expenses and revenue. The expenses represent what it costs to run your organization and the revenue is the money you intend to raise in order to cover those costs. Ideally, you want your revenues to be more than your expenses. Remember that a budget is a projection - it will not be perfect but you can use it as a guide to plan out your year.
A budget is one of the foundational pieces you must have as a startup nonprofit. It’s one of the four plans I suggest in my nonprofit startup workbook. I don’t recommend you start your nonprofit without it. You can start building your budget using the costs I outlined in this blog post HERE, but stay tuned in this article as I break down an easy process for creating your first budget. ALSO, you want to watch me create a budget from scratch, purchase my budgeting masterclass replay where you can look over my shoulder and follow my exact process.
Why do you need a budget?
If you don’t write down your plans, you’re way less likely to reach your goals. It’s the same with a budget. If you want to raise enough money to cover your operations, then you have to be clear on what those costs are. Without a budget, you’re shooting in the dark, hoping and wishing that you’ll make enough. You end up relying on random goals with no real sense if you’re heading in the right direction. Without a budget, you can’t create a clear fundraising plan, which helps you identify the fundraising strategies for the year that will help to cover your costs. In other words, you shouldn’t be fundraising unless you first have a budget in place - even if there are ballpark figures in the beginning.
There are actually other more important reasons to have a nonprofit budget. Potential donors and funders need to be assured that you are financially capable to handle their gifts. You need to understand your true program costs so that you can intelligently respond when someone asks you, “where will the money go?” You show a level of credibility when you know how you plan to spend your money and have a clear sense of how much you need to raise.
Plus, the reality is, you’re going to come across a scenario soon enough where you’ll realize that you should have a budget in place. If you haven’t already, you will soon come across one of these dilemmas:
You found a grant that will be perfect for your organization but the funder is asking for a budget.
A potential donor wants to donate a large sum but wants to know how much you need to raise to cover your expenses for the year.
The board treasurer wants to do a year-end report but has no data and nothing to compare it to.
You want to hire an Executive Director but you’re not sure how to do it, and how you’re going to pay for it. See my video HERE to learn more about how to pay yourself as an Executive Director.
All of those above scenarios demand a written plan for how you plan to approach your nonprofit’s year. So how do you create a nonprofit budget, especially when you’re starting from scratch?
Steps to creating your nonprofit’s first budget
For a detailed breakdown of this budgeting process, purchase my budgeting masterclass where I complete a live demonstration of how to create your budget using several budget templates.
1. Identify your programs
This may not feel like a logical first step, but it’s one that you have to do. Many people don’t see their activities as “programs”, they just do the work. But in order to categorize costs and keep track of your activities, you need some sense of organization to describe those activities.
The simplest way to do that is to package your activities as programs.
There’s no exact science to identifying your programs, but you generally divide up your programs either by the target population or the key activities. For example, you can delineate programs by population (e.g., a high school mentoring program, and a separate elementary school tutoring program).
You could also divide up your programs by activities. Maybe you only serve youth but you have a nutrition program, and a separate college prep program. There’s no correct answer here, but you should have a clear delineation and name for your programs so it’s easy to distinguish them from each other.
I generally advise that people have no more than 1-2 signature programs to start out with - anything beyond that you probably don’t have the capacity to do, and you risk being distracted on keeping up instead of perfecting your processes so that you can implement successful programming.
2. Identify your goals for the year
The next step is to identify your goals for the year. Ask yourself, what do we want to accomplish? In what ways do we want our organization to progress? This is the point in the process where you start writing down your hopes for the organization, and then eventually you will start quantifying those hopes.
Here are some questions to start with (a full list of questions to ask yourself can be found in my budgeting masterclass, which you can purchase HERE).
How many people will we serve this year?
How many services will we provide?
What activities are completed to reach program outcomes?
Think about what goals you have for programming, but also any other goals related to building your infrastructure, and any communications or marketing goals.
3. Identify your budget categories
Before you start assigning costs to the overall goals for the year, you need to be clear on how you want to categorize them in your actual budget. These categories should match up with the list of accounts in your accounting systems so when you start tracking actual expenses and revenue you can have a direct comparison to see how you’re doing.
Typical revenue sources can be captured within two big categories:
Contributed Income - includes income that is donated or granted to your organization.
Earned Income - includes income where you provide a service or product in exchange for money.
You will have a line for each fundraising strategy you’re using (like individual donations, grants, etc.).
For expenses, you might have the typical cost categories:
Salaries and payroll costs
Rent and utilities
Vehicle costs
Equipment
Supplies and materials
Printing and copying
Telecommunications
Travel and meetings
Marketing and advertising
Training/Staff Development
Contractors (including independent contractors)
Meals and entertainment
Insurance
Miscellaneous
Fundraising costs
Those are general categories, but speak with your accountant about the categories that work best for your nonprofit. As your budget increases, you will benefit from having more detailed cost categories, and an accountant can show you how to track by program using an accounting system as well.
4. Identify costs
Next, you want to assign numbers to the goals you identified in step 2.
The easiest approach is to start with staffing costs first, which are typically separated on expense budgets anyway. Here are some questions you should answer regarding staff:
How many staff are working per program?
Are staff full-time or part-time?
Are they employees or independent contractors?
If you are a new organization, you may not have staff yet, but don’t worry! Just skip to the other types of non-payroll expenses.
Also, I like to break down costs by month by each expense category (listed in step 3). For example, if one of your goals is to conduct a group mentoring session every month during the year, ask yourself what are all the costs associated with putting on one session. Will there be any rent or utility costs? Vehicle costs? Do you need to purchase equipment, and so on, and so on. By going line by line, you can make sure you’re not skipping expenses that you will need.
Try to be as accurate as possible. If you know you need to cover telephone costs, research the costs (including all fees and taxes) to cover the phone costs of all your staff. If you plan to use a storage space to store items, price out the monthly costs including fees and add it to your budget.
Once you’ve gone through each line, add the estimated numbers to your budget template.
If you have more than 1 program, you should develop separate budgets for each program that roll-up into your overall organization budget. This can get complicated, but I go into way more detail, including showing you how to use a template in my budget masterclass HERE. If that’s too complicated, then it’s fine to start with one overall budget that includes all of your programs. As you grow, you can get more sophisticated with your planning and tracking.
5. Estimate your revenue
Now you want to fill in the other half of your budget - your revenue. This part goes hand in hand with your fundraising plan (see a template of your fundraising plan in my nonprofit startup workbook). Estimate the type of revenue you need - for a startup, I recommend using my GIF strategy. G for grants, I for individual donations, and F for fee for service/earned income strategies.
For grants, identify the amount you want to raise in grants for the year. These will be smaller, more local, community grants. Remember that grants are typically restrictive and won’t cover a lot of administrative costs (don’t know what administrative costs are? See this glossary HERE).
For individual donations, identify a group of donors who are willing to fund your startup costs and give money directly. Use my peer-to-peer workbook for help with this strategy.
For fee-for-service strategies, identify a service or product that you can sell or charge to fund your services. This is the most flexible of all your funding sources, because there are no stipulations on how to spend the money once you earn it.
Estimate the total amount you want to bring in for each revenue category and add it to your budget. Make sure that your total revenues cover all of your expenses for the year.
And there you have it! Following this process, you will have your first budget in place. Here are a few tips that I’ll share for the process:
Budgeting Tips
The development of your budget should be an inclusive process - especially when it comes to identifying your program goals for the year. Involve the entire board, particularly when it comes to talking through different revenue strategies you’re going to try during the year. The board’s responsibility is to maintain the financial health of your organization so they should be actively involved in this process.
Break down costs and revenue by month. It’s hard to project overall performance for the entire year. It’s way more tangible and an easier process when you project costs per month. It’s also easier to account for seasonal changes when you track by month.
Track your progress in meeting your budget milestones at least quarterly. This process is not perfect, which is why you need to constantly reevaluate your original plan to see if you need to adjust and change strategies mid-year.
After reading this, my hope is that you are no longer intimidated by the budgeting process. It should be a process that you welcome because it gives you the freedom to dream for your nonprofit. If you don’t have a budget in place, I encourage you to start working on it immediately, and watch the success that comes afterwards!
Any questions or feedback on the budgeting process? Drop them below!
