When you think of your nonprofit budget, what comes to mind? Is it the revenue you generate from your fundraising campaigns, the expenses you incur to keep your organization running smoothly, or perhaps the general stress surrounding the budgeting process?
Above all else, nonprofit leaders know, your budget is ultimately a tool that facilitates your mission. All the numbers and chaos boil down to a document that ensures you allocate resources appropriately to fulfill your organization’s purpose.
This guide will help you develop a nonprofit budget that aligns with your mission and supports your goals, allowing your organization to grow sustainably and help more beneficiaries.
1. Clarify your mission and strategic goals
Your nonprofit’s budget should reflect your most pressing priorities. Revisiting your mission ensures it is up to date and allows you to make informed financial decisions based on what is important. Take these initial steps to get your team on the same page:
- Review your mission statement. While you likely know your nonprofit’s mission statement by heart, you probably don’t look at it with a close eye very often. Take the time to think critically about your mission statement and whether it truly encapsulates your nonprofit’s main focus. For example, if you run a childhood cancer research foundation and have recently expanded to focus on other diseases as well, your mission statement should reflect that.
- Update your strategic plan. Your nonprofit’s strategic plan is a guiding document that outlines your current priorities and how you plan to achieve them. Reviewing and updating your strategic plan ensures you make budgeting decisions based on your top goals and secure the resources you need to achieve those goals.
- Identify key programs and initiatives that support your mission. Consider your programming in the context of your goals. Which initiatives most directly further your mission? You’ll likely want to prioritize or expand these programs in your upcoming budget.
Once you have a solid understanding of your mission and strategic goals, you’ll have a strong foundation for the budgeting process. Even if you don’t have an upcoming budgeting cycle, revisiting your purpose is still helpful for aligning your team and informing your work.
2. Involve various stakeholders in nonprofit budgeting
The more stakeholders you involve in the nonprofit budgeting process, the more holistic and reflective of different aspects of your nonprofit’s strategy and mission it will be. Here are the main stakeholders you should work with and how they should contribute to your budgeting process:
- Leadership. Your nonprofit’s executive director or CEO and senior management staff will oversee the annual budgeting process. Since they are your organization’s main decision-makers, they know how to allocate resources to best serve your mission.
- Board. Board members intimately understand your organization’s current priorities and strategic direction. As a result, it is their job to review the budget to ensure it aligns with your nonprofit’s goals and approve it.
- Finance committee. When it comes to finances, accountability and transparency are key. The finance committee ensures your budget complies with accounting standards and regulatory requirements. They also verify that your budget is reasonable and will allow your organization to pursue its mission sustainably.
- Nonprofit accountant. Hiring a nonprofit accountant ensures you have an expert providing budget-to-actual reporting, which compares your projected revenue and expenses to your actual revenue and expenses. That way, you can adjust your approach to better allocate resources toward your mission.
While these are the main internal stakeholders you should involve in your nonprofit’s budgeting process, adopting a shared power mindset that incorporates external stakeholders’ perspectives is also essential. For example, you may ask beneficiaries which areas of your programming are most valuable to them and consider investing more heavily in those initiatives.
3. Review revenue sources
Determine where your revenue comes from to ensure you have enough funding to support your mission. Compile nonprofit financial statements and past budgets to assess performance and identify your primary revenue streams. These may include:
- Monetary donations
- In-kind donations
- Grants
- Corporate philanthropy
- Membership dues
- Investment returns
- Program fees
- Consulting fees
- Rental income
Diversifying your revenue streams allows your organization to remain financially stable and flexible so you can more confidently pursue your mission. This step may help you identify gaps in your funding strategy and prompt you to explore new sources to further bolster your ability to fulfill your nonprofit’s purpose.
For example, if you run an environmental conservation nonprofit, you may seek grants for environmental organizations or form strategic partnerships with businesses that prioritize eco-friendliness.
4. Use your nonprofit budget to allocate resources appropriately
Strategically allocate resources to cover your costs in a way that aligns with your mission. Start by sorting your expenses into the following categories:
- Program expenses, which are directly tied to the programs and services that support your mission
- Management and general expenses, which are associated with your nonprofit’s overall administration and governance
- Fundraising expenses, which are incurred while raising funds for your organization
For example, a program expense may be materials purchased for the children’s summer camp you run, a management and general expense may be payroll costs, and a fundraising expense may be fundraising event-related costs.
Then, prioritize your most pressing expenses based on your goals. While you’ll allocate most of your nonprofit budget to program expenses, don’t forget your other supporting costs or overhead.
The prominent overhead myth states you should keep overhead costs below a certain percentage since they don’t directly support your mission. However, as YPTC’s nonprofit financial management guide explains, “These costs are necessary to ensure your organization’s operations run smoothly, allowing you to build your capacity to pursue your mission. Every nonprofit has a different ideal amount they should allocate to overhead costs based on their organization’s age, size, geographic location, and specific needs.”
5. Build flexibility into your nonprofit budget
Unexpected situations may force you to adjust your nonprofit’s budget. Building flexibility into your budget from the beginning allows you to continue pursuing your mission despite financial challenges.
Include a contingency fund in your nonprofit budget. This fund sets aside money to cover unexpected expenses or buffer against revenue changes. A small percentage of your budget should go to your contingency fund each year as a preventative measure. For example, if a natural disaster destroys your nonprofit’s facilities, you can use the contingency fund to cover repairs.
You should also leverage scenario planning, which involves creating different versions of your budget based on potential financial situations. When you have these plans in place, it will be easier to adjust your financial management strategy in a crisis.
Once you’ve developed your nonprofit budget, monitor and adjust it as needed—both based on performance and mission alignment. That way, you can continue using your budget as a tool to pursue your purpose and keep your organization financially viable.
