Most people go into the nonprofit sector to change the world, not to read financial statements and develop budgets. Alas, reading financial statements and developing budgets are critical tasks that executive directors and program directors must master.
The budget is a key tool, which executives in the organization use to make strategic decisions on managing and allocating resources. The board must also review the budget and financial statements to make sure the organization is in a financially solvent position.
If you aren’t especially confident in formulating a budget, review our top ten budget tips below. If you need additional help, let us know.
- A budget is a planning tool that helps the organization move forward in its effort to accomplish goals and objectives.
- Develop at least two budgets for the organization. One should be a general operational budget and the other should be one or a series of program related budgets. Make sure when drafting a program budget that you include all of your administrative and overhead costs.
- Always develop the operational budget in conjunction with a review of the organization’s values, mission, goals, and objectives — and with an eye on the upcoming year’s programs and projects.
- The operational budget is essentially a financial road-map for the organization spelling out ways in which you can financially reach your goals.
- One way to begin the budget process is to identify the potential and committed revenue sources and then work in reverse in terms of costs and expenses before revenue. This may seem a bit backwards, but if you analyze your revenue first, you’ll get a more realistic picture of what dollars you have available.
- When looking at revenue try to be as diverse and broad-based as possible. As you design the annual fund, incorporate such revenue streams as foundations, corporations, direct mail, small and major gifts, earned income or revenue generated by fees for services, contracts from governmental units, interest income, etc. The more financially diverse, the more stable and healthy the organization.
- Always write a budget narrative that explains the items in the budget. This will help the staff, board, and stakeholders fully understand the numbers.
- Develop the numbers with budget figures vs. actual figures so you can determine whether you are under budget, over-budget or on-budget. The board should review these figures at their regular meetings.
- Keep your program budget’s administrative costs under 20 percent if possible. Administrative costs must be reasonable and shouldn’t raise red flags when potential funders review them.
- Generally, the categories in a simple budget include: personal (salaried employees, plus fringe benefits); office expenses (including rent, computers, printing, postage, travel, telephone, parking, supplies); consultants; equipment (if you will be purchasing new equipment). Your program budgets will include the same budget categories, but should focus on particular programs.