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effective budgeting for nonprofits

Effective Budgeting for Nonprofits: Get the Most Out of Your Resources

Effective budgeting is an essential skill for anyone and anything that deals with a limited amount of money. Individual people. Businesses. And of course, nonprofits.

If you ask anyone on the outside, they’d probably imagine nonprofits are always straddling the fence of financial solvency. After all, most of their communications from nonprofits are letters, calls and emails asking people to donate more money.

Reality is a bit more complicated.

“Nonprofit finances in the United States were relatively strong at the beginning of 2022, largely as a result of government and foundations stepping up their support of nonprofits during the COVID-19 pandemic,” says the Stanford Social Innovation Review. “However, inflation, economic volatility, increasing demand for services, and a reversion to pre-COVID funding practices indicate that nonprofits will soon face familiar financial challenges to serving their communities.”

In other words: Nonprofit finances aren’t always on the brink, but just like with businesses, nonprofits can run into money woes amid periods of economic distress.

That’s why effective budgeting is vital for nonprofits. During lean times, it can mean the difference between surviving another year or folding. And during bumper times, smart budgeting can help them build the reserves they’ll need to deal with those lean times.

Today, we’ll discuss budgeting techniques and best practices for nonprofits. What you learn here should help you better allocate financial resources, meet your goals, and demonstrate accountability to your donors and other stakeholders.

Budget Tips for Nonprofits

1. Fine-Tune the Budget Process

One of the first ways to improve your budgets is to perfect the budgeting process.

For one, set and communicate a clear timeline for everyone involved for contributing to or creating the budget. For instance, you might choose to lay out budget assumptions three years before the end of the current fiscal year; home in on revenue, income, operating expenses, capital expenditures two months out; then review, finalize and request approval one month out.

Past that, you’ll also want to make sure everybody has what they need, when they need it. When does the budget creator need actual previous-year numbers? When do those involved with the budget need to be informed of the next fiscal year’s goals and strategies? Who is responsible for delivering what information?

2. Identify Goals

Before you put a single number on a spreadsheet, you need to determine what your nonprofit’s goals are for the coming fiscal year. When determining your goals, of course, you’ll also want to determine any hurdles in the way, and what the organization will do if it does or does not meat those goals. Here’s a short goals template to start with:

  • What are this year’s primary/secondary goals?
  • How can we achieve those goals?
  • Do we have any stretch goals? If so, what are they?
  • What are hurdles in the way of our goals?
  • What is the timeline for each goal?
  • What will we do with any surplus funds?
  • What will we do if we have a funding shortfall?

3. Be Inclusive, Not Exclusive

Yes, when it comes to actually hammering out a budget, you don’t want too many people in the room. A large budgeting committee can make for a messy, complicated and drawn-out process.

That said, you should try to include people from many departments in the planning process. Department heads know their departments in ways that more senior managers might not. Thus, receiving input from various departments might provide insights you might not otherwise receive. You might find that one department has much more financial flexibility in their operations and can be used to buffer shortfalls. Or you might discover that another arm of the nonprofit is expecting a far more fruitful year than the one before, allowing you to be more aggressive with your projections.

4. Be Smart About Calculating Expenses

Determining expenses might be one of the most difficult aspects of the budgeting process.

The good news is, the lion’s share of the budget typically goes paying employees or supporting them, and these are relatively easy expenses to determine. Past that, things can get a little dicey.

Make sure you account for all potential direct costs, including supplies, equipment, travel, contractors and more. You’ll also need to account for support staff and services — tech help, human resources, accounting and more.

Additionally, you’ll need to separate operating expenditures and capital expenditures. Operating expenditures are what you need to function as a nonprofit — basically, everything mentioned above. Capital expenditures are typically multiyear projects and massive purchases, such as major equipment or headquarters upgrades.

5. Use the Budget to Actually Monitor Your Financials

You don’t create a budget just to forget about it once the new fiscal year starts. That budget is your nonprofit’s financial roadmap — and you need to keep looking at it throughout the year to make sure you’re still on the right road.

Every month, put together a “budget to actuals” financial statement. What did your budget estimate for revenues, income, expenses, etc., for the month? And what numbers did you actually hit? Where there are shortfalls, you’ll need answers. (Why did revenues come in at 90% of projections?) Where there are surpluses, determine whether the extra money should be put to work in the current fiscal year or put into reserves for a rainy day.

Managing Nonprofit Finances Isn’t Easy. We Can Help.

If you’re looking to level up your budgeting efforts, don’t shy away from a helping hand. Especially one that’s familiar with both nonprofits and accounting.

McManamon & Co. has developed a custom suite of services to optimize your nonprofit’s performance, attain compliance, mitigate risk and reduce operating costs. Our team of nonprofit experts provides expertise in the areas of assurance, financial advisory, governance, performance improvement and tax consulting. And we serve a broad range of nonprofit organizations.

Reach out and get the info you need today! Just call 440.892.8900 or contact us online.

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