In this step you will identify which income items are connected to specific program areas and what income can be directed at the organization’s discretion. Examples of income that is assigned directly to a program include contract or fee income for a preschool program or a grant that is received for a tutoring program. For this step we recommend that contributed income that is unrestricted or general operating support be assigned to the fundraising category for the analysis. The final analysis will clearly show what program areas require these sources of support and enable leaders to make the all-important decision about how to best attract and direct flexible funds. Track your nonprofit’s project-specific budget with this basic template.
Once you know the financial areas most important to your cause, you can measure your ratio, develop a goal, and strategize to improve it as a KPI. Create templates to develop estimates for areas where revenue or expenses are consistent and repetitive, such as travel or revenue proposals. Assign an average value for flights ($600), hotel stays per night ($250), per diem rates for food ($50), transportation ($50) and more to make it easier to calculate trip costs. Start with your known fixed costs like rent, utilities, salaries and insurance. Create a list of “nice to haves” you can add into your budget if you have projected funds left over after your necessary expenses are covered. This guide and accompanying spreadsheet template break down the process of understanding true program costs, either through budgeting or financial reports, into several stages.
Budgeting for Nonprofits
It can also help to identify areas where the organization may have been overspending or under-earning, which can then be addressed in the budget. It’s important to have all of your financial reports and receipts in order so that you’re ready for a state or IRS tax audit process. Talk to an accountant who can help you interpret these ratios and set key performance indicators to improve them for the future. In general, you should try to keep this ratio above 75% to maintain a healthy balance for your organization and in the eyes of the public.
Put another way, the budget for fixed costs should be limited to an amount that is equal to or less than the revenues you can count on. A key component of financial sustainability is the commitment of board and staff to financial management that includes timely review of financial reports and advance planning. One way that board and staff plan for income and expenses in the future is by creating a budget.
Review the organization’s past financial performance
Revenue diversification requires strategic planning, creativity, and a willingness to adapt. In the following section, we will delve into budgeting practices that can aid nonprofits in managing their financial resources effectively. Some small businesses operate as nonprofit entities or as part of larger nonprofit organizations. Salvation Army and Goodwill Industries thrift shops are two well-known examples. If you run a nonprofit business, part of your income probably comes from grants and donations.
Keep adding to these tips and best practices and you’ll have the process down in no time. Under the heading of expenses, boards need to focus expenditures on their programs and activities. Expenses include direct costs, such as the cost of hiring new staff, ordering supplies, providing brochures or other publications, ordering supplies and travel. Capital expenditures are expenses needed to acquire or maintain fixed assets, such as fixing or maintaining buildings, land and cars. Indirect costs, which are also called overhead, include things like utility bills, internet fees and postage.
Step 3: Submit the Proposed Budget to the Board
There should be enough lines in your budget to provide for a comprehensive understanding of the financial situation. However, the budget should be high-level enough so as to not be cluttered and overwhelming. These are only some of the many benefits a good budget brings to an organization.
The savings indicator ratio measures your nonprofit’s ability to add to its net assets. This nonprofit financial ratio allows nonprofits to see whether they’re generally putting their financial overages in their reserve fund, or if they have a tendency to spend it. Even the financially or programmatically smallest nonprofits—often operated entirely with volunteers — have their knowledge of costs spread across two or more people. There are as many forms of nonprofit budgets as there are forms of organizations. Unlike financial statements, which have some rules and guidelines according to accounting standards, the same level of industry-imposed standardization for budget documents and formats doesn’t really exist. Budgeting for nonprofit organizations takes a bit of time, but planning your budget is too important to make the mistake of rushing through it.
Find Support in Managing Your Nonprofit Operating Budget
Reviewing the organization’s past financial performance is another important step in creating a nonprofit budget. This information can provide insights into trends in the organization’s income and expenses, how to calculate operating budget nonprofit which can be helpful in estimating future income and expenses. Usually, nonprofit organizations review their budget monthly with more in-depth quarterly reviews to see if they’re on track.