Nonprofit budgeting is a critical activity that involves more than establishing financial spending limits for the new fiscal year. It can be part of an exercise led by accounting that helps department managers think through and prioritize plans for the year.

Analyzing budget history, reviewing what-if scenarios, and estimating revenues and expenses helps everyone consider all aspects of proposed activities and better plan for the new fiscal year.

In this first of a three-part article series, we’ll discuss budgeting basics: types of budgets, with an emphasis on the three most popular types of budgets for nonprofits. In Part 2, we will continue discussing budgets and some important uses of budgets for strategic planning, and in Part 3, we will discuss budget forecasting.

Three Popular Types of Nonprofit Budgets

There are many types of nonprofit budgets, each focused on a different aspect of the organization’s finances. The three most common types are operating, grant, and program budgets.

Operating Budgets
An operating budget for a nonprofit organization outline expected revenues and expenses over a specific period, typically a fiscal year. It is used for planning, monitoring, decision-making, and ensuring accountability to donors, grantors, and other stakeholders by demonstrating how funds are used, as well as an internal guideline to manage expenses and revenues.

Critical components of an operating budget include revenue projections from:

• Donations,
• Grants,
• Program fees,
• Fundraising events, and
• Investment income.

Expense projections cover:

• Program costs,
• Administrative expenses,
• Fundraising costs, and
• Capital expenditures.

Additionally, contingency funds are set aside for unexpected expenses or financial shortfalls.

Creating and maintaining an operating budget is crucial for a nonprofit organization's sustainability and effectiveness. It ensures that the organization can continue to fulfill its mission while maintaining financial stability.

Grant Budgets

Grant budgets track revenues and expenses back to a specific grant. They ensure that the funds provided by the grant are used effectively and per the grantor's requirements. The grant budget helps in planning, monitoring, and reporting on the project's financial performance, providing transparency and accountability to the grantor.

Usually, budgets are required as part of the grant application process. That budget would likely be used for the grant budget within the accounting software. It’s important to have accounting software that can separate out the grant budget from the operating budget.

Grant budgets can have a different budget cycle than the organization’s budget timeline and sometimes the grant cycle can be longer than a year.

Helpful Tip: Be sure your nonprofit accounting software accommodates differing budget cycles.

The major components of a grant budget include:

• Revenue projections - Typically the funds provided by the grantor.
• Expense projections - All costs directly related to the project, such as salaries for project staff, materials and supplies, travel expenses, and any other operational costs necessary to achieve the project's objectives.
• Indirect costs or overheads - Portion of the organization's general administrative expenses allocated to the project.

A major consideration with grant budgeting is reporting. Often the grant budget format is specified by the grantor. It’s important your nonprofit accounting software handles different reporting formats and has the capacity to match the formats your grantors require.

Program Budgets

A program budget details the expected revenues and expenses of a specific program or project. It is a crucial tool for managing the financial aspects of individual programs, ensuring that resources are allocated effectively to achieve the program's objectives. The program budget helps plan, monitor, and evaluate the program's financial performance, providing a clear picture of how funds are used to support specific activities.

Oftentimes, a program budget can have a different budget cycle than the organization’s budget timeline.

Helpful Tip: Be sure to utilize nonprofit accounting software that can accommodate differing budget cycles.

The components of a program budget are similar to, but not identical, to an operating budget. They include revenue projections, which may come from grants, donations, program fees, and other sources specific to the program.

Expense projections cover all costs directly related to the program, such as salaries for program staff, materials and supplies, travel expenses, and any other operational costs. Additionally, indirect costs or overheads, such as a portion of administrative expenses, may be allocated to the program budget to reflect the actual cost of running the program.

Creating and maintaining a program budget is essential for ensuring the program remains financially viable and can achieve its goals. It allows the organization to track financial performance, make informed decisions about resource allocation, and demonstrate accountability to funders and stakeholders.

It also enables stakeholders to evaluate whether a program is financially viable by tracking year-over-year revenues against expenses; if programs are not sustainable, they must be assessed against both financial and mission goals. Sometimes, programs are kept because they fulfill critical mission-based objectives, even if they lose money. However, only by evaluating the program budget and measuring financial criteria can a nonprofit understand each program’s fiscal health.

Set and Achieve Your Organization’s Financial Goals

Setting financial goals effectively is crucial for success and sustainability. You may already have a planning process in place that includes budget planning. If not, and you’re looking for ideas to incorporate specific steps into the budget planning cycle, the suggestions below can help you with the budgeting process.

1. Define Clear Objectives
Start by identifying your goals. Your goals should align with your organization's mission and strategic plan. For example, you might aim to increase donor contributions, secure more grants, or reduce operating costs.

2. Use the SMART Framework
SMART goal setting is used in many industries and represents a time-tested framework for setting goals. It can also help you set your program and grant-related goals as part of the budgeting process.

Ensure your goals are:

• Specific: Clearly define what you want to achieve.
• Measurable: Set criteria to track progress and measure success.
• Achievable: Make sure the goals are realistic and attainable.
• Relevant: Align the goals with your organization's mission and priorities.
• Time-bound: Set a deadline to achieve the goals.

3. Involve Stakeholders
Engage your board members, staff, and key stakeholders in goal setting. Their input and buy-in are essential for setting realistic goals and ensuring everyone is committed to achieving them.

4. Break Down Goals into Actionable Steps
Divide your goals into smaller, manageable tasks. This makes it easier to track progress and stay on course. For example, if your goal is to increase donor contributions by 20%, break it down into steps like improving donor outreach, enhancing your donation platform, and organizing fundraising events.

5. Monitor and Adjust
Review your progress toward your financial goals regularly. Use financial reports and key performance indicators (KPIs) to assess your progress. Be prepared to adjust your strategies if you need to catch up to meet your goals.

6. Communicate Progress
Keep your team and stakeholders informed about your progress. Regular updates help maintain momentum and ensure everyone knows the achievements and challenges that must be addressed.

7. Celebrate Successes
Recognize and celebrate when you achieve your financial goals. This will boost morale and motivate your team to work towards future goals.

Following these steps, you can set practical financial goals that drive your nonprofit organization towards more excellent financial health and mission success.

About AccuFund - Nonprofit Accounting Software Makes Budgeting Easier

Nonprofit accounting software simplifies the budgeting process.

1. Streamlines budget creation with customizable templates and tools
2. Saves time and reduces errors
3. Provides real-time financial tracking to monitor income and expenses
4. Supports scenario planning
5. Offers various budget cycles and enhanced reporting with detailed insights which can be shared with stakeholders and grantors
6. Integrates with other systems, like donor management tools, to create one centralized financial database
7. Ensures accountability by maintaining transparent and accurate financial records

When choosing nonprofit accounting software, look for features that include robust budgeting and forecasting tools, real-time financial tracking, and automated reporting for detailed insights. Integration capabilities with other systems, compliance and audit support, and a user-friendly interface are also essential.

Additionally, ensure the software offers strong security measures and scalability to grow with your organization.

These features will help streamline financial management and effectively support your nonprofit's mission.

Related Materials

AccuFund Nonprofit Accounting Software
AccuFund Budget Development
Nonprofit Storytelling White Paper
Grants Management Executive Paper