A budget may not be exciting to prepare or review, but it is essential for any organization, including a nonprofit.

budget graphs

Budgets, particularly over a period of years, can be extremely useful not only to make sure that dollars are available to pay bills as they come due – and that the organization is accountable for the money entrusted to it by donors – but also to provide data that can be used to measure programmatic success and cost effectiveness.

The purpose of a budget is to allocate resources to accomplish the organization’s mission. This presumes that the organization’s mission has been defined in a mission statement and made tangible by articulating quantifiable short-term and long-range goals.

Nonprofits should articulate such goals to engage in rational strategic planning. A budget is one of the tools used to accomplish the organization’s strategic planning, both short-term and long-range.

There are different types of budgets, and different ways of isolating and analyzing financial data, that can be used to measure programmatic success and cost-effectiveness of certain activities. Here are some examples:

1. Budget the costs of specific revenue-raising events and resulting revenue. This can help the organization evaluate the effectiveness of particular revenue-raising techniques.

2. Isolate and analyze donations by zip code, age, repeat or new contributors, or other factors for the useful information it may reveal for planning solicitations or fundraising in the future, including targeting particular potential donors.

3. Segregate costs of particular programs and relate to goals for that program as a way of measuring the cost-effectiveness of the program. A budget can transform abstract goals into determinable performance goals.

Compare budget results over a period of time. What you see may help you decide how best to strategically allocate resources and determine whether your long-term goals are being met.

Be prepared to make adjustments to the budget prior to expiration of a budget period when revenues or expenses differ significantly from those that were projected. This principle applies both to the overall budget for the organization and to budgets for particular projects. A mechanism should be in place to monitor and compare “reality” with the revenues and expenses that were projected in a budget.

By periodically comparing budgets to actual financial performance, the organization can spot trouble and opportunities and make adjustments to changing conditions or incorrect assumptions that otherwise might have escaped notice.

Other general tips when preparing the nonprofit’s budget:

1. Start the process early through a formal annualized timeline with specific responsibilities for individuals or departments.

2. Be conservative in your estimate of anticipated revenue. Past experience can be a guide, but it’s easier to deal with an unanticipated surplus than an unanticipated deficit. Your fundraising goals may be enthusiastically high, but your budgetary estimates of funds that will be raised should be cautious.

3. Remember that the revenue stream is seasonal or irregular for some nonprofits, peaking during certain fundraising events and dwindling during other periods. In contrast, fixed expenses, such as rent, staff salaries and utilities, continue to come due during “dry” periods. This is one of the reasons that nonprofits need to prepare a budget and stick to it.

4. Plan for cash reserves to adjust to unexpected expenses and to pay periodically recurring but not necessarily annual expenses, such as replacement of equipment, a new roof, major repairs, etc. This is safer than waiting until things break down and you have an “emergency” to pay for.

5. Set aside money in the budget for anticipated expansions planned for in the organization’s programmatic goals.

6. Involve program personnel in the budgeting process to make sure you get their input. This also creates “buy-in” when it comes time to implement the budget.

7. Imagine unlikely, but possible, negative events that might impact revenue or expenses when preparing the budget. It may be prudent to plan for such events.

8. Consider tax reporting requirements and the extent to which the budget structure should correspond to them, formats used by funders, or the organization’s own data gathering. Sometimes collecting and structuring the data with an eye towards other formats the nonprofit will have to deal with can save time and money.

Professional advice from a CPA can help you set up a prudent budgeting process to make sure that money has been set aside to pay the bills when they come due, whether fixed costs, variable costs, costs of anticipated expansion or otherwise. A CPA also can provide advice on the relevant budgeting periods that the organization should utilize.