Budgets for Nonprofits
Nonprofits are unique organizations in that they raise money to further their mission, not create a profit, hence the name. Examples of nonprofits include charities, social advocacy groups, religious organizations, community theaters, and welfare organizations. NPOs have to evolve to meet new trends, appeal to donors, and most importantly devise a practical budget that enables them to do so.
Budgeting for a nonprofit is complex and convoluted, so oftentimes organizations fall short on their financial planning. Since nonprofits rely on donations and external funding, finding a steady stream of income can be difficult. These uncertainties must be accounted for in budgets by keeping an eye out for new income opportunities, and allowing wiggle room for revenues that fall through. The only consistencies in nonprofit budgets are inconsistencies.
What Should a Nonprofit’s Budget Include?
A budget is a comprehensive plan that includes the goals and objectives of the organization for a designated fiscal period. Since NPOs are so dynamic, budgets are referred to throughout the year to accommodate for cash flow and expenses.
Nonprofit budgets are often requested by banks and donors for consideration before they make their decision to give money. This means the budget should be thorough, concise, and dynamic to account for income fluctuations.
At their core, NPO budgets should include anticipated revenue and expenses:
Revenue: general donations, program revenue, monthly donations, loans, interest income, grants (only include grants if you are confident you’ll receive it)
Expenses: direct costs, indirect costs, capital expenditures
Expenses can be further divided up into three types:
Direct costs: project costs, materials, event programming, transportation
Indirect costs: overhead, payroll, rent, utilities, insurance, advertising, fees
Capital expenditures: property, real estate, cars (this should not be calculated into your annual budget, as capital expenditures aren’t purchased every period)
When assembling your budget, make note of the assumptions you’re making. For example, if you assume that a donor will give a certain amount every month, your budget should be prepared for the possibility of less frequent donations, or none at all.
You should also be using real numbers, not estimates. Taking the time to calculate real expenses and revenues will make a big difference down the line. This should go without saying, but double check your math. Even if you are using a program like Excel to total your numbers, sometimes numbers can get left out and skew your budget.
There is also a misconception that nonprofit budgets must always break-even, but this is simply not true. In a perfect world, all nonprofits would spend exactly how much they bring in, but that’s not the case. Surplus funds can be used to pay down debt, ease the burden on cash flow, and invest in fundraising or programming for the future.
Common Budgetary Problems
Budgeting is arguably the biggest challenge nonprofits face because there is financial instability at every turn. One in four nonprofits have less than a month of cash-on-hand, meaning a fourth of all NPOs can barely cover basic costs, let alone plan for future investments. These are some of the main budgetary problems nonprofits face:
Lacking financial expertise
Many NPOs have small staffs that aren’t experienced in financial planning. Without the expertise to craft a detailed, extensive budget, a nonprofit will encounter budgetary issues like coming up short for expenses. Additionally, small staffed nonprofits typically leave budgeting for last, with other, more immediate tasks taking priority.
Delayed grants and loans
Nonprofits battle it out each year to get a slice of not for profit 501c3 grants. These government grants are hard to come by and extremely competitive. Additionally, banks have tightened their restrictions on loans because of the unpredictability of nonprofits. The issue with relying on grants and loans is that those funds often take a long time to be dispersed, they aren’t guaranteed, and in the meantime NPOs have to figure out how to cover payroll and expenses.
Relying on donations
Raising funds and relying on donations as a source of income is extremely unstable. If donors do not deliver every month, or the economy is struck by a recession like we saw this year with COVID-19, people will be less likely to open their wallets, and nonprofits will suffer. Donations are not guaranteed. Therefore, neither are the NPO budgets that rely on them.
Budgeting for nonprofits is a difficult task that requires a lot of assumptions and leaving wiggle room for unexpected changes. A budget is necessary to track the total spending and income of an organization to prevent losing beneficiaries and going deep into debt.
If your nonprofit is just starting up, take the time to develop a proper budget, decide on the programming for the year, calculate those costs, and then estimate the revenue you’ll bring in. The key to a successful nonprofit organization’s budget is being prepared, tracking numbers carefully, and planning for the unexpected.
Thankfully, GritForce Bookkeeping does just that! They provide a virtual bookkeeping service, personalized for small businesses and non-profit organizations. GritForce works with you to get your books in order so you can focus on your main priorities. Their goal is to assist you to understand your financial position, enabling you to make smarter, informed decisions.