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"