Like any other business, nonprofits need to plan ahead using budgets, often based on prior financial data and expectations for the future. This process, done a few months before the new year starts, involves managers and board members, to make sure the budget is reasonable and attainable.

There are many ways to start the budgeting process. Many organizations develop budgets based on income first and then expenses, while others start with expenses and then work on the revenue -- it depends on the nature of the organization. For example, when a nonprofit receives most of its income from grants, it's easier to estimate income first and then work on expenses. 

In order to develop a good budget you need to be realistic and detailed-oriented.  A lot of research is required, and not just financial, but programmatic as well --- is the nonprofit going to expand or shrink certain programs?  Are there any plans for construction or other capital improvement?  You cannot do it in a bubble --you need a lot of information from the past and from the future, and that usually involves many meetings and discussions.

The first step to create a budget is to print out current revenue and expense detailed report by account and use that as your basis for the future. For example, if you see rent expense of $1,000 a month, then you should budget for this amount for the following year, unless you know that the rent will increase or decrease in the near future. You need to look at each account and try to forecast the best you can about the following year. This type of work is often done during the last months of the prior year, so that any trends or new information is included in the budget. 

Although budgets are usually done once a year and then the numbers remain static, there are instances where budgets are changed and re-approved by the Board during the year. This may happen when a nonprofit loses or gains unexpectedly major funding, making the original budget obsolete.

Nonprofits receiving government funds incorporate grant budgets as their own. It doesn't make sense to use multiple budgets --- it creates confusion.  Organizations also need to consider government cuts and how that would affect operations.  As a rule, budgeting for a bit more revenue than expenses, allowing for cuts and unexpected expenses is a sensible approach. It's always good to have a bit of a financial cushion.

Once budget numbers are approved by the Board and entered in the accounting system, the next step is to get actual vs. budget numbers in reports starting with the first month of the new year. Be sure to look at budget variances for the month and year-to-date. If you only look at monthly numbers, you may miss variances that may be small on a month-by-month basis, but significant for the year. For instance, if you see that your revenue is down $10,000 this month, it may not mean much, but if you compare year-to-date actual to budget numbers, you may have a $100,000 hole in the budget that needs to be corrected by using funds from prior years or by cutting down expenses.   

Note that many nonprofits count on restricted funds to operate and that's when confusion may starts up. When developing an operating budget, differentiate between restricted revenues and others and be sure that donor documentation supports the decision to use restricted funds. You cannot unilaterally decide to use restricted funds -- the donor must have given express permission for the money to be used a certain way. Some organizations have separate budgets for capital expenditures to be used in major construction or other major project, which can be a sensible budget approach. Keep the operating budget separate and review both, looking for discrepancies and double counting. For instance, you may receive funds to construct a school and that should go towards the capital budget only -- not towards operations. In some cases, the same funding may show up in two different budgets by mistake. Look out for those that can create a major problem.

See more here -- Nonprofit Financial Statements are Different
 
Check out 'Nonprofit Finance: A Practical Guide"
Website: www.webshanker.com

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Sheila Shanker CPA is an experienced consultant with many years of experience, including developing courses and teaching "live" and online.  Her long experience with nonprofits has given her the inside track about their operations and management issues, especially in the financial area. You can reach her at sheila@webshanker.com

 


Comments

Leny E Althouse
09/03/2015 4:45pm

09/03/2015
Dear Sheila: congratulations for your publications! Love, Leny.

Leny E Althouse
09/03/2015 4:46pm

Congratulations! Parabenz!

Sheila
01/30/2016 3:52pm

Thanks!! I'll be publishing more soon.:-)

11/24/2015 4:47am

he Minnesota Council of Nonprofits is an association with over 2,000 nonprofit members. Learn more about how MCN: Saves nonprofits time and money.

Sheila
01/30/2016 3:55pm

Nothing beats the purchasing power of "aggregates" that usually can get products and services faster and cheaper than if a nonprofit can do by itself, especially smaller ones.

I'm pretty pleased to discover this page. I want to to thank you for ones time for this particularly fantastic read!! I definitely really liked every part of it and I have you saved as a favorite to see new information on your web site.

02/19/2016 1:29am

Budgeting in non-profit organization is quite difficult but pretty interesting. The real confusion will start only when we get into funds need to used only for restricted purposes.

Sheila
02/19/2016 4:35pm

Yikes. Restricted funds can be tricky because it's usually not in operations and can be "forgotten". A good way to keep it all straight is to have a separate bank account for restricted funds. If general net assets are used for something that should be covered with restricted ones, then actual money is transferred to cover for restricted items.

Many nonprofits with restricted funds budget for those funds as well, especially if they are substantial as in the case of construction.

02/20/2016 12:03am

Many thanks for your time to solve my query.

03/01/2016 10:00pm

My friend mentioned to me your blog, so I thought I’d read it for myself. Very interesting insights, will be back for more!

Sheila
03/03/2016 3:58pm

Feel free to look around :- )

03/12/2016 12:05am

I will check out these articles. Thank you!

03/13/2016 10:22pm

It's great you have update it.thank you.I located this is a helpful and appealing post.

earl augustin
04/12/2016 6:12pm

Am from the Caribbean island of st Lucia and have an organization called caribaid foundation and don't have a buget to run my organization. Need some funds. What can l do to be granted some funds.p

Sheila
04/13/2016 12:39pm

Funds come from mostly governments, foundations, businesses, other nonprofits and individuals. So, you may need to do some research to figure out the places that fund programs in your area.

You may google your country and grantors to see the possibilities available. Some examples are:

https://www.grantwatch.com/cat/20/international-grants.html
http://grantspace.org/tools/knowledge-base/Resources-for-Non-U.S.-Grantseekers/funding-for-non-us-organizations
http://www.fundsnetservices.com/searchresult/30/International-Grants-&-Funders.html

Be very specific on your mission statement and programs. You may also consider becoming a branch of a larger nonprofit that may be interested in having operations in your country.

Hope this helps :-)

07/12/2016 10:46pm

I need this article to complete my assignment in the college, and it has same topic with your article. Thanks, great share.


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