Nonprofit Accounting Budgeting Basics
Nonprofits may create budgets for their fiscal year, for their next fundraising campaign, or for their next capital campaign, sometimes spanning several years. Making sure your budgets are aligned across all departments will prevent excess spending and help create more accurate budgets for the future.
Some view budgeting as a way to cut spending. A better way to frame it would be to say, “ budgeting is designed to prevent unnecessary spending”. Creating a budget doesn’t mean that your nonprofit needs to cut expenses for the things you need. Instead of causing unnecessary strain by dramatically cutting expense budgets, make sure the line items of your budget are realistic and manageable by looking at the organization as a whole. Comparing your budgets to actual income and expenses is an important part of improving your budgets over time.
Here are a 4 tips to make the budgeting process easier and to help ensure your budgets are aligned and achievable.
1. Maintain Nonprofit Bookkeeping Standards
Bookkeeping is maintaining financial records while accounting, on the other hand, encompasses the strategic financial decisions informed from these records. In order to create an effective budget, you need to start with effective bookkeeping. If your records are out of date, it slows down the budgeting process and leads to misinformed decisions. Some things you can do to improve your bookkeeping include, starting with and keeping an organized ledger, reconciling accounts monthly, and tracking program costs correctly. For more information on Nonprofit bookkeeping click here.
2. Set Realistic Goals
Realistic goals and objectives help team members, including managers, see where the organization is heading and what each of them needs to accomplish to achieve them. That makes budgeting an important part of a sustainable business. To create realistic goals, look at similar project expenses and work with leadership to determine any future increases or decreases in capacity or scale. Keep communications open with other departments to monitor their progress as well. Your grant writer will have a good idea of what funds may be coming in the future and what operational needs will be required. Understanding how the organizations sales, grants, marketing, operations and accounting work together will ensure your budgets are both sufficient and sustainable.
3. Ensure Proper Nonprofit Resource Allocation
Revenues can come from many sources. It can be contributions from the public, grants/endowment, ticket sales, auction proceeds and fees for goods and services. Each should be evaluated and reasonable. For example:
Public Contributions - Consider the current and expected state of the economy, the financial situations of contributors, and the likelihood of raising money.
Grants and Endowment - Assess grantor requirements and make sure you qualify. There could be reporting requirements to the donors, or restrictions on how and what to spend the money on. Can you accurately fulfill these requirements?
Earned Revenue & Events - Ticket sales, auction proceeds, and fees for goods and services are great ways to raise funds. But make sure you are realistic when assessing the amount of money, you expect. Every source of revenue should be evaluated before being considered.
4. Estimate Accurate Nonprofit Expenses
Expenses should be allocated correctly from the beginning. Make sure that any expenses that are directly related to a project are associated with that account, while non specific costs should be allocated to operating expenses. Direct expenses may be the cost of hiring new staff for a project, special supplies or materials, costs related to publications, or travel tied to a specific program. Indirect or overhead expenses are costs that are not directly associated with a specific project but may be necessary to achieve it. Often these types of costs support the organization as a whole such as; telephone charges, internet, utilities, office supplies, or postage.
Benefits of Accurate Nonprofit Budgeting
Making sound financial decisions is essential to any organization, whether it is a nonprofit or for profit business. Creating and maintaining budgets will help achieve strategic goals and ensure that you have a cushion when unexpected emergencies or expenses arise. A good budget can help you get or stay out of debt, understand your financial situation, and increase investment funds for the future.
