A good nonprofit operating budget is the key to fulfilling your mission as a nonprofit organization, and the more accurate (and realistic) it is, the better equipped you’ll be to weather any rough patches and continue serving your beneficiaries.
Once you've created your operating budget, you'll submit it to the board for approval. You will then use the operating budget as a financial management tool to ensure that your revenue and expenses are on track.
Step 1: List Your Projected Revenues and Expenses
Your annual operating budget lists all of your expected revenue and all of your expenses for the coming year. When the revenue and expenses are realistic and accurate, your operating budget will:
Help you make decisions about the goals you will realistically be able to achieve and prioritize expenditures to help you stay tightly focused on your mission.
Show you whether you are running at a profit or a loss. You want a 3-5% operating margin to ensure you're not stretched so thin that an unexpected crisis, expense, or low period would force you to close down.
Show your board members how you plan to spend your money so that they can provide feedback and guidance.
Show your supporters how much you are spending on operating expenses vs program expenses and where their donations go. This transparency is important for building trust with current and potential donors.
While the annual budget is your broad-scope budget, you’ll need a separate budget for capital expenditures such as land acquisition and construction projects that take more than one year to complete. Your capital budget will inform your operating budget to ensure you have enough cash for both your short-term and long-term goals.
Revenue Sources
Nonprofit organizations have several sources of revenue—some of which are more dependable than others. These include traditional income sources like the sale of products and services as well as nonprofit-specific income sources like fundraising and grants.
In your annual nonprofit budget, include all of the following income sources that apply:
Merchandise sales
Ticket sales for events
Income from programs (such as community workshops)
Memberships and subscriptions
Individual donations
Corporate donations
Corporate sponsorships
Foundation money
Grants
Appeals
Peer-to-peer fundraising campaigns
Crowdfunding campaigns
Donation-matching campaigns
Loans
In-kind donations, including volunteer hours, donated goods, and donated capital assets
Miscellaneous income (interest from investments, any other income sources)
If there is any revenue that's been granted for a specific project or "direct costs only," you need to make sure that you're only counting on those funds for the destination project and not as part of the general kitty. Allocating funds and prioritizing spending are both part of accounting services for nonprofits.
Expenses
In nonprofit budgets, around 35% of your expense budget should be used for administrative expenses (overhead) and the other 65% for program expenses. Among your annual projected expenses, include fixed expenses like rent and loan repayments as well as variable expenses like marketing and fundraising costs. In-kind donations should be assessed as to their fair market value (FMV) and listed as both revenue and expenses so that they cancel each other out.
Overhead Costs (Fixed)
Office space
Loan repayments
Capital asset depreciation (vehicles, office equipment)
Utilities (water, electricity, gas, internet, telephone)
Staff expenses (salaries, insurance, required contributions)
In-kind expenses (volunteer hours, donated office space, etc.)
Other Administrative Costs
Technology and equipment
In-kind expenses (donated technology, equipment, and capital assets)
Office supplies
Postage
Printing
Mileage
Marketing
Consulting
Legal fees
Small business bookkeeping
Small business accounting
Contractors and freelancers
Staff training
Board education
Fundraising expenses
Volunteer recruitment
Volunteer appreciation
Program Costs*
Program A
Program B
Program C
Program D
*It can be helpful to include the total cost of each program in the annual budget. However, you'll also need a specific budget for each project that breaks the costs down into things like materials, mileage, insurance, contractors, and so on.
Step 2: Estimate Amounts Based on Last Year's Budget and Any Quotes You Have for the Coming Year
The figures that you put in your nonprofit budget will mostly be based on last year's budget, with a few changes:
Take into account the changes and corrections you made to last year's budget during the year when creating the new budget.
Don't include large, one-time gifts or grants from the previous fiscal year in future budgets.
Budget for an increase of 5 to 10 percent in overhead expenses.
Multiply each revenue source by the chance you have of receiving it. For example, if you have a 50% chance of winning $10,000 in grant money, budget for $5,000.
Add any new expenses you will have, including capital asset depreciation for newly acquired capital assets, and expected donation amounts from foundations and corporate sponsors.
Once you have added all of your anticipated revenue and expenses, you can calculate your projected operating profit and projected operating margin.
The operating profit is: revenue - expenses
The operating margin is then: operating profit/operating revenue x 100
If you've been conservative in your projected revenue and your nonprofit operating budget breaks even, you can be fairly confident of being able to reach your short-term goals. However, a small surplus is preferable for financial sustainability. You want to know that you have enough "spare" to keep running your programs for 3-6 months even if something unexpected happens (such as a natural disaster, pandemic, recession, political upheaval, etc.).
Step 3: Submit the Proposed Budget to the Board
Once you've finished the budgeting process, you will present your proposed budget to the board.
After any changes, if any, it will become known as the “adopted budget” and then as the “operating budget” once the year in question begins.
Step 4: Continue to Review the Budget Throughout the Year
After creating a nonprofit budget and having it approved, you'll continue to look at this financial document throughout the year.
Usually, nonprofit organizations review their budget monthly with more in-depth quarterly reviews to see if they're on track. If you're spending more than you planned or aren't making your expected revenue, you can plan another fundraiser or scale back on spending.
Step 5: Perform an Audit on the Previous Year's Income and Expenditure
After the year comes to a close, you will perform an audit on the previous year. This is usually done between January and June. The audit provides key information, including:
Your actual base operating cost
Whether you made a profit or loss
Your operating margin for the previous fiscal year
With this information in hand, you will create a budget for the following year that will allow you to continue your operations as you are now. You might even find ways to make future operating budgets more cost-efficient.
Cash-Flow Projections Are Essential
In addition to an operating budget, you'll also need to prepare cash-flow projections to ensure that you'll have the cash on hand when you need to spend it. To prepare this financial document, you'll need to think about the timing of key fundraisers, appeals, and corporate or philanthropic donations, and any time-based factors that influence spending.
For example, if you typically receive most of your donations at the end of the year, it makes sense to schedule one-time spending projects for the period spanning January through March. However, if your nonprofit organization mainly runs activities in the summer months, you might decide to run a campaign during the spring.
Don't Forget about Taxes
Nonprofit organizations have a number of exemptions when it comes to tax but will still need to file tax returns with the IRS and your home-state tax department.
It's important to have all of your financial reports and receipts in order so that you're ready for a state or IRS tax audit process.
Which Taxes Do Nonprofits Pay?
Taxes and tax exemptions vary by state and the type and size of the nonprofit. A nonprofit operating in Jacksonville, Florida, for example, might need to pay reemployment tax and potentially sales and use tax as well (unless they qualified for the Florida Consumer’s Certificate of Exemption).
Order Your Finances So You Can Focus on Your Mission
Nonprofit budgeting has a learning curve, and it can take a few years to get a clear idea of your strongest revenue sources, base expenditure, and the projects that have the greatest impact.
As you pay attention to your financial health and track your inflows and outflows, you can make decisions that keep your mission central to your spending—giving you the assurance that every dollar truly makes a difference.
