In order to create an effective budget, nonprofit organizations must establish an effective budget process. An effective process engages those responsible for adhering to and implementing the objectives created in the budget, including the financial committee and senior staff. Organizations must establish a budget timeline, leaving plenty of time for the research, review, feedback and revision of the budget. The yearly budgeting process should be thoroughly documented and clearly state the tasks, responsibility assignments and deadlines needed to create the budget. An effective process also incorporates strategic planning initiatives and requires that income be budgeted before expenses.
Once the budget has been reviewed and revised by the necessary people, it will be presented to the organization’s board. Prior to submitting it to the board, organizations need to take the following into consideration when creating a budget:
- Budget Income First. Make sure that you base your income targets on realistic expectations and only include income in the budget if it is reliable. Never include an income projection to fill the gaps of expenses. This is not realistic and sets your organization up for a budget deficit before the year even begins.
- Keep Expenses Lower than Income. This may seem obvious, but it is crucial when creating an effective budget. Make sure that your expenses are always lower than the total dependable income.
- Analyze and Understand Your Revenue. Does your organization depend on a single source of revenue? In some cases, the lack of diversity in revenue sources can threaten the financial stability of an organization should the sole revenue source become unavailable. There is no “right” list of revenue sources, so in order to find the right sources, you will need to analyze your organization’s circumstances, mission and industry and find a good match for your organization.
- Make Sure Your Budget Supports Your Mission. Before you even begin to develop your budget, you need to sit down and go over your organization’s mission and strategic plan. Make sure that all strategies that have an effect on the budget are included in the budget you create. Your budget is designed to communicate and support your organization’s mission through numbers, so make sure that your allocation of funds coincides with the mission of your nonprofit.
- Budget for Capital. The budget should take an organization’s annual operating income and expenses into account, as well as ensure resources for long-lived or non-operational needs (the capital budget). The capital budget could cover several years and should include target amounts and fundraising strategies to achieve the organization’s financial and strategic goals.
- Make Notes to Explain Budget Assumptions. Board and committee members will appreciate any explanations you offer to help them understanding the underlying thoughts behind the numbers in the budget. While it is best to present budgets in spreadsheet format (which does not allow for much note-taking room), you can provide the board with narrative notes in a separate document. Whether or not the notes are in a separate document, make sure that you add a key that associates each note to the related line on the spreadsheet.
As you can see, developing an effective budget takes a lot of hard work and determination. While it may not be an easy process, your organization will benefit greatly from the work you put into your budget. By maintaining an inclusive budget and well-documented policies, an organization can carry out its mission thoroughly and effectively. If you have any questions about creating your budget, please contact us today.
For more tips on creating effective budgets, read our article “Five Tips for Effective Budgeting”.