Nonprofit Budgeting Basics

In our introduction to this blog series, we talked about why budgets are important, and in this blog, we’ll delve into the who, what, where, and when of budgeting. Whether you’re new in your leadership role, or have served for a long time and would like a refresher, I’ll walk you through some practical steps to help you get started in creating a strong budget that works for your organization.

Just to be clear, budgets are prepared by the staff of the organization. However, the board offers important thought partnership at the start of the process, and will be responsible for approving the final budget annually.

• Board. To begin, you should have a high-level, facilitated discussion with your board to identify strategic, programmatic, and financial objectives, in addition to mission priorities that you all would like to accomplish in the year. 
• Advisory team. You could create a budget advisory team that includes selected staff and board members to guide the budgeting process in alignment with programmatic and financial objectives, and mission priorities identified by the board. This select group of leaders will provide big-picture thinking and support.
• Senior program staff. In many larger organizations, the program directors will create their own budgets each year; but in smaller organizations, it is the executive director who will create the whole budget, which may include smaller budgets for specific programs and projects. Input from staff can be very useful about what worked and what didn’t work last year, and new ideas for the coming year. In addition, including staff in the formation, use, and monitoring of financial results can motivate staff to be more fiscally minded.

Here are some of the resources I recommend gathering to get started:

Strategic Plan: As the ED, you can make sure your budget aligns with the strategic thinking of leadership, particularly if you will be engaging in expanded programming, implementing new business ideas, or contracting any programs over the upcoming year. Please note that the strategic plan does not need to be overly formal or even extremely thorough to be adequate.

Financial information: We can use the following reports to give us data that can be used as a guide to help craft the new budget.

• This year’s current budget. We can use the annual budget as a guide to give us information on the original thinking that leadership had at the outset of the current fiscal year. 
• Past operating results. Past results can give us information on how we performed as we start thinking about the future. 
  • Last fiscal year. If you are beginning your 2018 budgeting process in October, say in 2017, past results could mean using last fiscal year’s year-end operating results – meaning the Statement of Activities (Income Statement or Profit & Loss (P&L) statement) from January to December 2016. 
  • 6-month results. Because the last year’s information may be a little dated, it may be helpful to use 6-month results (as of June 30, 2017), as it gives us an accurate picture of where we were midway in the current year. 
  • Year-to-date (YTD) results. This gives us a little more color and helps us understand how we have done since the six-month mark. 
• Current forecast. Ideally you would take the above information and create a forecast as to how you will end the year.
• Funder data: It is helpful to get an accurate picture of the current intention of each of your larger funders.

Excel or a similar spreadsheet-software system that allows you to organize, format and calculate data with formulas. Seems obvious, I know, but I have on more than one occasion received a budget typed up in a Word document. Because budgeting is an iterative process, you need the flexibility that an Excel-type spreadsheet provides.

Depending on the size and complexity of the organization, best practice suggests that you will want to begin the process at least three to six months from the end of your fiscal year. 

Once you have created your draft 2018 budget, you will take it to the finance committee of the board (or executive committee/internal affairs committee if you don’t have one) for review and discussion, which most likely will lead to some revisions. Once approved by the appropriate committee, the budget will be presented to the full board for approval. Unless something drastic happens, in my opinion, that should be the only approved budget for the year. You should reforecast on a quarterly basis to get an idea of where you will end up for the year, but the board does not necessarily have to approve the reforecast. (More on reforecasting in the sixth part of our series).

Next up: Budgeting Best Practices

Making Your Budget the Backbone of Your Nonprofit

Resources:

A strategic plan can be used to gain an understanding of leadership’s priorities, where they will focus time, energy, and resources, and how they will strengthen operations. This plan ensures that staff and other stakeholders are working toward common goals, it establishes agreement around intended outcomes/results, and assesses and adjusts the organization's direction in response to a changing environment.

A Five-Step Guide to Budget Development
Meaningful Budget Work by the Board
Boards Should Only Have Three Committees!

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