Nonprofit organizations rely overwhelmingly on donations to continue operating and accomplishing their goals and objectives. Because the revenue they receive is inconsistent and subject to change, they must plan for every contingency with their budgeting process. Here are seven ideas to consider when budgeting for nonprofits.
1. Develop a budgeting committees
The budgeting committee should reflect the knowledge and objectives of the nonprofit. Volunteers for the committee should be selected on the basis of previous knowledge and familiarity with the organization’s activities, on their desire to serve all of the organization’s interests as opposed to specific projects, and on their comprehensive knowledge of budgeting.
The committee’s task is to perform the following:
- Estimate the costs required to achieve each of the organization’s objective
- Estimate dates and expected revenues to be generated
- Develop the timeline of the budget
- Compare expected dates and revenues to the estimated expenses accounted for in the budget
- Develop and present the final budget for approval
2. Define tasks and responsibilities
The tasks and responsibilities of each member of the budget committee and the nonprofit organization at large must be clear and comprehensive. Every member must understand their role within the organization. Various tasks and responsibilities should be delegated to individual members and employees, and lines of communication always kept open to ensure no misunderstandings.
3. Set priorities and goals
The nonprofit should develop a list of comprehensive annual objectives. While keeping in mind past income and expenditures, realistic goals must be proposed and accepted by the organization. These goals are meant to guide the budgeting process going forward.
4. Determine expenses for reaching goals
The budgeting committee will estimate the cost required to achieve each objective. This should be partially based on a comprehensive knowledge of the organization’s activities in preceding years, but the committee must also factor new programs or activities into their budget.
5. Develop the timeline of the budget
An essential part of budgeting is forecasting an accurate and achievable timeline to be approved by the board. The timeline helps organize the day-to-day activities of the nonprofit, and realistic planning will allow the organization to reach its budget targets.
To develop a comprehensive timeline, the committee must look at its goals, its projected costs, and organize deadlines and targets around those variables. The more detail behind the timeline the better, as it makes it more likely to be approved by the board.
The timeline should be realistic, but ambitious. The challenges of fundraising and budgeting make it difficult to set specific targets, however, budgets serve as plans that are subject to change. The organization’s budget timeline must strike a balance between its sensible expectations and its ambition to do the greatest possible good.
6. Project income budget
Income, of course, is what the organization spends in order to achieve its goals. If the money isn’t there, the organization can’t do anything. So designing a comprehensive list of revenue sources, expected revenue, and then projecting a timeline of total revenue is an essential part of the budgeting process.
Projected revenue can constrict the designation of goals, expenses, and the operational timeline of the organization. Therefore, projected revenue must be compared against the organization’s expected costs and budget timeline. The budget committee can then retool the budget until it is as realistic and comprehensive as possible, and ready for presentation to the board.
7. Have a reserve fund
Budgets are, fundamentally, plans that organizations make to achieve their goals. But budgets don’t always go according to plan. Therefore, an organization should have a reserve fund leftover from previous fiscal years. If a reserve fund doesn’t exist, an organization should plan to make more revenue than it plans to spend in that given year. This will help ensure the organization can achieve certain objectives—even if they demand more revenue than expected—and can address unplanned expenses that might otherwise threaten the budget.
Nonprofits must think strategically, and applying the strategy of instituting a reserve fund is important to provide organizational stability. If a donor pulls out, a source of revenue disappears, the organization must replace depreciated capital before expected, or needs to hire new employees—a reserve fund can take the pressure off and help replace missing revenue. It gives the nonprofit the ability to act strategically in replacing sources of revenue over a longer period of time.
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Recommended Readings
Innovative Tips For Coordinating Nonprofit Organizations
Public Administration: Building More Diverse Public Organizations and Businesses
Sources
Forbes – 5 tips to better manage nonprofit finances
NonProfit Finance Fund.org
NonProfit Quarterly.org
Virginia Society of CPAs