How should a nonprofit prepare its budget?

What steps are involved and what role does the board play?

Your operational budget is the foundation from which all of your work will be carried out. It allows you to establish benchmarks, gauge financial health from one year to the next, and determine priorities.

Here are some key steps in developing your budget:

  • Establish your budget period (one year, multiple years).
  • Review program achievements and financial performance for the prior year.
  • Set program and organizational goals for your budget period.
  • Estimate expenses, including: Fixed costs such as staff, rent, taxes, utilities, etc., variable costs that fluctuate based on activity level (e.g., the cost to vaccinate more clients in a health clinic would fluctuate based on the number of clients and environmental factors such as a flu outbreak) and incremental expenses, which occur when a particular action is taken (e.g., when a certain amount of money is raised, a new program will be launched).
  • Estimate anticipated revenue.
  • Plan for needed cash flow and development of cash reserves.
  • Adjust to align expenses and revenue.

Your board of directors should be called upon to comment on and approve your organization’s budget each year. From there, it becomes a tool for monitoring progress and determining areas for refinement, if necessary. Your budget should also be provided to the board at quarterly meetings, along with comparisons to the prior quarter and prior year, and projections for the remainder of the year.

As a reminder, when it comes to planning your budget, be conservative. It’s easy to say how much money you’d like to raise, but it’s far more important to be practical about what can be raised. That way you’ll be setting realistic goals for your staff and managing everyone’s expectations, including your own.

Adapted in part from Finance Manual, by Jan Masaoka and Jude Kaye.

Finance FAQ

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