Guest post by Jitasa

In the nonprofit sector, an essential question that many organizations face is how to accomplish ambitious goals with limited resources. Different nonprofits try to solve this problem in various ways, from making their fundraising efforts more efficient to carefully prioritizing the programs and projects that further strategic growth.

However, a key tool that your organization may overlook in this process is your annual operating budget. As the master financial plan for your entire nonprofit, this document allows you to gain a deeper understanding of your organization’s available resources and properly allocate them to cover all necessary costs.

To help you get started, this guide will walk through four foundational strategies for creating your nonprofit’s annual operating budget—let’s dive right in!

1. Set Clear Goals

As with the other plans your nonprofit makes (strategic plans, fundraising campaign plans, etc.), starting with clear goals is essential for your operating budget to be as useful as possible. When setting these goals, Jitasa’s nonprofit budgeting guide recommends ensuring they include:

• Defined activities. Review your organization’s current strategic plan and meet with your team to determine what mission-related activities you’ll prioritize during the year. Each of the line items in your budget—both revenue and expenses—should either be related to these activities or to other essential aspects of running your nonprofit, such as maintaining operations or saving for the future.

• Comprehensive timelines. While your full operating budget will cover one fiscal year, you also need to consider when different expenditures or revenue-generating activities will take place. This will help you avoid spending money you don’t yet have, keep up with deadlines for payments and grant applications, and ensure your team isn’t spread too thin when you run concurrent activities.

• Realistic, measurable metrics. Once you know what your organization is doing when in terms of its finances, you can attach dollar amounts to each activity. This process is most effective when you base your decisions on your nonprofit’s recorded financial data (more on this later!).

These features of an effective nonprofit operating budget line up well with the SMART method of goal-setting—i.e., ensuring your goals are specific, measurable, attainable, relevant, and time-bound—which can be a helpful framework for presenting your goals to your team.

2. Review Past Financial Data

Since budgets are future-focused documents, the numbers in them predict your organization’s spending and revenue generation for the coming year. To make more accurate projections, it’s helpful to look back at your nonprofit’s actual numbers from the past few years. Some resources you can use to do this include your organization’s:

• Transaction records, which should be stored in your accounting software and kept up-to-date by your nonprofit’s bookkeeper.

• Financial statements, which organize and summarize data so you can more easily draw actionable conclusions from it.

• Nonprofit audit reports, which detail your auditor’s objective perspective on your organization’s financial situation.

All of these resources should help you figure out how much revenue your nonprofit can reasonably raise from various sources and which of your expenses are most vital to your organization’s success.

3. Organize Expenses by Function

Once you’re ready to start drafting your nonprofit’s operating budget, it’s best to start with the expense side since it’s typically less flexible. Most nonprofits organize their projected spending based on how it furthers their mission—i.e., by function.

The three categories of functional expenses are as follows:

• Program costs are directly related to your mission and vary widely from organization to organization. For example, an animal shelter’s program expenses would likely include its rescue pets’ food and veterinary care, while a nonprofit art museum’s might include the costs of acquiring and maintaining collections of paintings.

• Administrative costs are necessary for your organization to operate day-to-day and range from utility bills to office equipment purchases to staff compensation.

• Fundraising costs are the upfront expenses associated with revenue-generating activities, such as event planning, marketing, and fundraising software fees.

You might have also heard the term “overhead expenses,” which refers to your nonprofit’s administrative and fundraising costs combined. While there are various recommendations about how much of your organization’s revenue should go toward your programs versus your overhead, the exact breakdown will look different for every nonprofit. Just remember that although some overhead is necessary to run your organization, you should put as much funding toward your programs as possible to further your mission effectively.

4. Categorize Revenue by Source

By first establishing your nonprofit’s total expenses for the year, you’ll know how much revenue you need to generate to cover those costs. Using this projection as a guide, determine where this funding will come from and categorize it accordingly so you can set accurate goals for various fundraising campaigns.

To boost your organization’s financial stability, include a variety of revenue sources in your budget, including:

• Individual donations. These make up the bulk of most nonprofits’ funding and include small, mid-sized, and major monetary gifts, as well as event revenue and in-kind contributions of goods, services, and non-cash assets such as stocks.

• Corporate philanthropy. This category includes all charitable contributions from for-profit businesses, such as sponsorships, matching gifts, and volunteer grants.

• Earned income. Although this revenue stream isn’t typically associated with nonprofits, your organization can legally earn income by offering memberships, selling branded merchandise, or charging fees for services provided.

• Investments. This is also a relatively uncommon nonprofit revenue stream and isn’t the most lucrative for short-term fundraising. But as Infinite Giving’s cash management guide explains, investing in low-risk vehicles like mutual funds and money market accounts is an effective way to grow and steward your organization’s long-term savings.

• Grants. Whether they’re provided by government agencies or foundations, grants are often critical for funding your nonprofit’s most important programs and projects. Since most grants are specialized and competitive, look for grants that align closely with your organization’s needs and make sure to submit well-written proposals by their deadlines.

A common misconception about nonprofit budgeting is that because nonprofits by definition can’t turn a profit, their operating budgets have to break even every year. In reality, your total projected revenue can—and should—exceed your predicted expenses if possible. Combined with diversified funding sources, this surplus provides a safety net in case your projections shift throughout the year and makes it easier to plan for future growth.

Although you’ll create your nonprofit’s operating budget from scratch once a year, effective budgeting isn’t a one-and-done process. Check in with your budget at least once a month to see if you’re on track with spending and fundraising, and make any necessary adjustments to keep your organization on the best possible financial trajectory.