As a non-profit, your budget is one of your most strategic tools. It brings clarity and definition to your programmatic planning. If done well, your budget allows you to plan for the long-term sustainability of your organization. Most nonprofits, however, struggle to create a truly useful budget.
We encourage all nonprofits to think of their budgets as a guide to plan future activities and assess current financial health. A nonprofit budget should include two important characteristics: it should be “program based”, and it should utilize “shared operating costs,” as we will explain.
Creating a Program-Based Budget
For non-profits, a program-based budget allows you to plan the allocation of resources for each of your programs and build a solid framework for tracking the inflows and outflows of funds for each program. If you visualize a standard budget, you probably see your income and expense accounts with totals for the year. A program-based budget should include income and expense totals not just for the organization as a whole, but for each program as well as administrative expenses and fundraising.
Breaking out programs separately allows for many benefits, as follows:
- It enables you to see the bottom line for each of your programs. Some programs may be fully funded by grants, while others may be using most of your unrestricted dollars. This information is essential in planning your spending and fundraising.
- It allows you to keep better track of your restricted dollars. If you receive a program-specific grant, for instance, you need to make sure that you spend that money down through the year and not use those restricted dollars to subsidize any other program. With a program-based budget, you can ensure that all restricted income has associated expenses.
- It can inform your fundraising efforts. A program that has more expenses than restricted income may provide a great fundraising opportunity. You can show the planned expenses and their impact as well as your funding situation.
Using Shared Operating Costs to See the Actual Cost of Running a Program
Too many nonprofits struggle to get funding for operating expenses (rent, utilities, supplies, etc.). The problem lies in how nonprofits distinguish Program costs (or “Direct Costs”) from Overhead (or “Indirect Costs”) and don’t utilize shared operating costs.
A portion of your rent, your internet, salaries, and even your printing paper should be allocated to each of your programs. These are considered “Shared Operating Costs”. This is not a sneaky workaround: this is the appropriate way to do things according to the Generally Accepted Accounting Principles (GAAP) published by the Financial Accounting Standards Board (FASB).
By using shared operating costs:
- You can see the actual cost of running a program. By having the full and accurate costs of each program, you can then aim to raise the appropriate amount of money from funders and not be left scrambling to raise money for operating costs.
- It helps you report to the IRS and donors on your 990, a clear breakdown of your functional expenses. Using shared operating costs can help you get your program costs as high as possible (donors like to see most funds allocated to programs).
Keeping an Accurate Budget is Extremely Important
There are so many benefits to an accurate budget, but one of the most immediate is the knowledge and peace of mind you get from seeing your budget to actual reports as the year goes on. You and your board can obtain a granular picture of programmatic and organizational sources and uses of funds. Are you raising what you planned? Are you spending more than planned? Instead of blindly pushing through the year, you can routinely check your guide and make any necessary changes.
Trust the Professionals at Goldin Group
At Goldin Group LLC, we understand that as a business owner or non-profit manager, keeping up with accounting and taxes is time-consuming and can even be overwhelming. We work with nonprofits and businesses, offering a one-stop-shop for financial services. If you are a nonprofit looking to outsource your accounting or if you need help managing any aspect of your nonprofit’s finances, we would love to hear from you! Call us at (301) 913-0008 or email firstname.lastname@example.org to make an appointment.