Nonprofit Budgeting Best Practices: Planning For Your Organization’s Financial Health

Tips for a not-for-profit's current and future budgeting

A well-planned nonprofit budget gives an organization’s leadership more control, increased transparency, better accountability, and improved performance. A not-for-profit’s (NFP) budget isn’t much different from its for-profit counterpart, but it requires perhaps more careful, detailed attention. The organization must remain compliant with all of the legal requirements for a tax-exempt entity while fulfilling its mission.

What is a Nonprofit Annual Budget?

Like in a for-profit business, an annual budget serves as its annual financial guide allowing you to better understand the financial state of your organization. When aligned with your strategic plan and focused on your mission, it serves to predict revenue, estimate expenses, and allocate resources to maximize your effectiveness. It is a time-consuming but necessary process.

The budget needs to include both expected income and likely expenditures. Prior year results can serve as the basis for the following year’s projections for both income and expenses. This assumes you will be making no significant changes in your organization’s business model or strategies. Similar organizations can provide guidance on how to budget for new revenue-generating activities.

When preparing the budget, in addition to leadership and finance, board members and certain staff may need to be involved in the process — if not in its entirety, perhaps certain portions. These are the individuals who, for the most part, are knowledgeable about a particular department or program, as well as being accountable for them.

Budgeting for Nonprofit Business Activities

Certain expenses are not easily predictable. You should account for this in the budget. At best, you know these types of expenses are likely to change, but you cannot easily project when or by how much. An nonprofit organization with a growing workforce, for example, is likely to see changes in its payroll expenses from one year to the next. The amounts of these changes, however, rely on a vast number of variables.

NFPs can engage in activities that resemble ventures in which almost any other business enterprise might engage, some of which can appear almost indistinguishable from for-profit ventures. For example, a not-for-profit organization can raise money by making and selling goods. It might charge fees for services it provides or tuition for a school that it operates. It can also obtain revenue through donations, grants, and other sources that are often not available to the for-profit sector. But these revenue-generating sources can come with both legal and contractual restrictions.

Budgeting for these types of activities is essentially the same whether the organization is a tax-exempt not-for-profit or a taxable, for-profit business entity. The assumptions underlying most business activities are not likely to change based on the organization’s for- or not-for-profit status.

1. Budgeting for Nonprofit Donations

The longer an NFP has existed, the more likely it is to have a loyal, dedicated donor base producing a consistent, predictable revenue stream. A donor database can help evaluate how many donors are likely to continue their support in the coming year. Newer organizations can make projections based on planned outreach (marketing campaigns), events (galas, golf/pickleball outing), and other strategies (media coverage) for attracting donors. Restrictions often apply to the use of donation revenue. The budget should reflect the limited use of those funds and anticipate the most efficient use of the funds in light of the organization’s mission.

2. Budgeting for Nonprofit Grants

Grants can be a reliable revenue stream once an NFP has built a relationship with a grantor. Maintaining this relationship can be labor intensive at certain points in the year, such as when grant applications are due. This form of revenue, therefore, tends to have associated expenses, such as payroll for a grant writer or grant-writing team.

If your organization will be applying for new grants in the coming year, your budget can include that potential revenue. Research into granting organizations is necessary to understand factors like their funding criteria and the likelihood of a successful application. Be aware that grant funding often comes with restrictions, such as a requirement that an organization uses the funding for one or more specified purposes. Budgeting for the organization’s expenses should reflect these restrictions as much as possible.

3. Budgeting for Nonprofit Events

Regular fundraising events, such as an annual luncheon or gala for donors, can be major sources of revenue. Past events can provide a reasonable source of projections for the coming year’s events. Newer and increasingly popular event techniques may require more attention:

• Paddle Raise. Attendees raise their paddle displaying their donor auction number, to give a specific donation. Amounts often begin with the highest amount, and decrease on a scale — $10,000, $5000, $2500, $1000, $500, and finally, $100. Donors show their paddle when the corresponding amount is called out. There’s no limit to the number of donors who can donate at any level.
• Fund-a-Need enables each donor to fund a specific item such as equipment, treatment, or technology. Donors are asked to fund the item based upon the cost of that item. Again, there is no limit to the number of donors who can donate to fund an item affording ample opportunity.
• Text-to-Give is a fundraising strategy that captures donations from supporters any time, anywhere. A code/address is provided for users to text gifts from their mobile device directly to the organization making the transaction quicker and easier.

Remember that unexpected circumstances will occur that may impact your fundraising and/or spending, so it’s wise to schedule reviews of, and potentially amend, the budget at a particular point or various intervals throughout the year. A well-planned, precisely followed budget can support the financial sustainability of the organization today and in the longer term.

The Not-For-Profit team at Freed Maxick can help support your organization through all phases of nonprofit budgeting. We can help you navigate through this difficult and often times strenuous process to prepare a budget that will help your NFP stay on track and assist leadership and the board of directors with making timely and impactful decisions. For a complimentary nonprofit budgeting best practices consultation, contact Holly Hejmowski, Director of Assurance and Advisory Practice, directly at HHejmowski@FreedMaxick.com.