A nonprofit’s annual budget is a key component of financial sustainability as it provides a nonprofit’s management and staff with a financial game plan for the upcoming fiscal year. An annual budget can be viewed as a guide to assess the financial health of a nonprofit and to plan the various activities a nonprofit will undertake in the coming year to meet its desired goals. As you will see, an approved budget is a crucial piece of sound fiscal management practices for any nonprofit organization.
Now that we understand the significance of your annual budget, let’s dig deeper into what this process looks like. Depending on the size of your organization you may need to get several different employees involved in the budgeting process. If there are any holes in your knowledge of projected revenue /expenses, it is important to ask yourself who may be able to provide a clearer perspective. For example, your Program Directors/Department Heads may be able to provide a better idea of which specific revenue and expense items given their high touch presence within certain facets of your organization.
Review prior financial statements and budgets. It is advisable to thoroughly analyze your previous year budgets, if you have them, and compare them with actual results. This will provide you with valuable insights to make informed projections and estimates. However, it is important to note that historical performance is only one factor to consider and may not always accurately predict future outcomes.
Define your annual goals. Ensure that every financial decision involving spending, saving, borrowing, or fundraising aligns with your organization’s mission and goals for the upcoming fiscal year. To maintain a budget that prioritizes your objectives, connect your goals to the numerical data in your budget.
Estimate your revenues based on your goals. Achieving absolute accuracy may not be feasible and that’s OK. By projecting your revenue realistically, you can create backup plans. Another approach is to develop both conservative and optimistic revenue projections and have a plan in place for both possibilities. For non-profits, revenue projections may also encompass funding from grants and other fundraising efforts. The goal is to gain a clear understanding of inflows and outflows of funds.
Estimate your expenses based on your goals. After clearly defining your mission and both short-term and long-term goals, the next step is to determine the cost of achieving those goals. This includes expenses such as salaries, utility costs, fundraising expenses, administrative expenses, and more. Accurately projecting expenses is crucial as it provides a realistic assessment of what can and cannot be achieved each year.
Identify the sources and uses of your organization’s funds. Building on the previous points, it’s important to allocate funding sources, like loans, endowments, or grants, to specific purposes. For instance, instead of just noting that a $30,000 grant has been received, go one step further and specify how the $30,000 will be utilized, such as for technology enhancements.
Project Cash Flow. Cash flow is a crucial aspect for any organization, including non-profits, and is often neglected by many non-profit leaders and business owners. In your budget, make sure that your cash flow calculations accurately reflect the actual inflows and outflows of cash. This will help you avoid any cash-related issues, such as being unable to pay bills due to a delayed inflow of funds from accounts receivable.
Here are some helpful things to avoid when creating your organization’s annual budget:
- DO NOT get overzealous with your predictions. When creating your nonprofit budget, it’s essential to avoid being overly optimistic. To stay grounded, aim to underestimate your revenue projections and overestimate your expenses. By doing so, you’ll be better prepared for any unexpected events that may impact your finances.
- DO NOT rush through the preparation process. The budgeting process is a crucial aspect of your nonprofit’s operations for the current year. Rushing through this process can lead to errors and miscalculations that can impact your organization’s success. Take your time to thoroughly review and analyze past budgets, goals, and expenses, to ensure a well-prepared and effective budget. Remember, a little extra time invested in preparation can go a long way in achieving your organization’s goals.
- DO NOT forget to implement your budget once it has been approved by your board. Approval of your nonprofit budget by the board of directors is just the first step. It’s crucial not to forget to put your budget into action. Make sure to effectively communicate and delegate responsibilities, establish tracking mechanisms, and regularly review and adjust your budget as needed to ensure its successful implementation and to stay on track with your organization’s goals. Proper implementation of your budget is key to achieving success for your nonprofit.
- DO NOT forget to develop a fundraising plan. Fundraising and the budget of an organization are closely intertwined and may require more time and effort than initially expected. To boost your annual budget, create a plan that aligns with your goals, while allowing ample time for everyone to carry out their fundraising tasks. Note that fundraising is a shared responsibility between the Board and Executive Director. Before developing a fundraising strategy, ensure that all board members are contributing significantly and comfortably to the organization. Board giving is crucial in establishing donor trust and confidence.
- DO NOT forget to review your prior year budgets vs. actual results. Comparing the budget to actual results can also bring attention to programs or initiatives that may be struggling to meet the year’s goals. For example, if the board’s priority is to acquire and launch a new database, and the actual results show no progress after 5 to 7 months, the board should inquire with the Executive Director regarding the progress. This regular review process can help ensure that the organization stays on track to achieve its goals.
The annual budget of a nonprofit organization is a crucial aspect of its financial stability, sustainability, and planning. It acts as a comprehensive financial plan for the upcoming fiscal year and enables the management and staff to effectively allocate resources and plan activities that align with the organization’s goals. The budget is not only a tool for monitoring the financial health of the nonprofit, but for making decisions that are commensurate with your organization’s goals. By providing a clear understanding of the organization’s financial status, the annual budget enables decision-makers to assess the feasibility of their initiatives and make informed choices.
Have questions or need help with your annual budget? Get expert budgeting advice from Goldin Group CPAs. Our team of nonprofit will guide you in implementing a comprehensive budgeting process and provide you with the best practices for financial sustainability. Get in touch with us today!