A budget is the GPS of your nonprofit. A budget is designed to help you effectively manage your nonprofit’s core programs and create a strategy for expanding the impact of your nonprofit’s mission nationwide.
Do not create a budget and forget about it until the end of the year when you are running out of cash. Your budget should change and evolve as your nonprofit changes its goals throughout the year.
Keep reading to learn the five tips to use in creating a solid budget for your nonprofit.
1 | Define Why
Define the reasons why you are creating a budget. Here are some questions to help you think through for this step:
Are we creating a budget to satisfy a grant request?
Are we creating a budget to keep track of our organization' spending habits?
Do we need more than one budget for our organization?
Are we creating a budget to strategically plan for the future?
Be clear and concise in your reasons for creating a budget for your nonprofit.
2 | Determine Who
Determine who should be involved in the budgeting process and who should be the facilitator and champion leader.
I recommend involving all of your stakeholders and assigning the responsibilities of creating the budget to each team.
Your stakeholders should include your staff members, committees, board directors, leadership council, etc.
Each stakeholder group should be responsible for coming up with the revenue and expenditures for the year in the draft budget.
Then, the board of directors can fine-tune and vote on the final budget. Also, define which stakeholder group will need to make changes to the budget if issues arise throughout the year. This should typically be your Board Directors voting if it is an annual budget.
3 | Define What
Define the high-level goals, program activities, and operational activities that align with your nonprofit's mission to track.
You can divide this process into small manageable monthly goals with key metrics to measure the success of each goal.
Some questions to help you define your goals are:
What is our mission? What do we want to accomplish this year?
What new programs do we want to launch this year? Are the programs consistent with our mission?
What happened to our numbers last year? How can we improve this year?
What is our long-term strategy for increasing the wealth of our nonprofit to continue to fulfill our mission?
What fundraising initiatives do we need to create to make all of this work?
What are our major funding sources? What percentage of those major funding sources do we need for the new year to survive?
Are there any external factors to consider (economic, financial, and physical) that will prevent us from fulfilling our goals?
4 | Determine How
Determine how much funding is necessary for each goal you created in step #3 and what key metrics to use in monitoring the progress of the budget versus your organization’s actual spending.
Some questions to ask when coming up with the numbers:
How much did we spend last year? How much did we receive in funding? Why? How?
What’s the true cost of our programs (indirect and direct)?
How much funding do we need to maintain a sustainable gross profit margin to remain operational?
What’s our target reserve percentage to save for rainy days?
Do we have any major debts that will decrease our purchasing power? What is the plan to reduce the debt?
Is the core funding of our organization tied up in restricted funds? If so, are they temporarily restricted? Can any of the funding be used for operations?
What’s our marketing plan to increase funding? How do we plan on measuring the success of each marketing plan?
Do we have enough to cover the technology and accounting costs associated with keeping track of funds?
The ultimate goal in this step is to create as many what-if scenarios using your organization’s past financial data, current business trends, and marketing efforts to forecast and anticipate the true cost of running your nonprofit.
Increases in funding mean more financial reporting and compliance requirements. Therefore, you need to budget for accounting fees (bookkeeping, advisory services, tax prep, and audit fees).
5 | Decide Where
Once you fine-tune your goals and assign dollar amounts to each one, you need to decide which accounting system to use to store the data and track your progress each month.
If you are using QuickBooks Online to manage your nonprofit’s finances, read my tutorial on how to enter your budget.
The beauty of using QuickBooks Online is that you can enter up to four different types of budgets and as many years as you need to track the profitability of your organization.
If you created an annual budget, you most likely will implement the budget in the beginning calendar year or fiscal year of your nonprofit.
If you created a funding source budget like a grant budget, you will have to follow the timeline and specifications listed in your grant award letter to enter the budget in QuickBooks Online.
Summary
Now you know the key 5 tips to use in creating a solid budget for your nonprofit. Add these tips to your governance policy and/or standard of operations documents so all of your internal stakeholders are aware of the process.
Need help in creating a strategic planning budget for your nonprofit? Schedule a consultation with Ufuoma Ogaga.
