How to Calculate a Nonprofit Operating Budget

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. Ensure your process includes appropriate approval steps for different types of changes while maintaining enough flexibility to respond quickly when needed. While familiar, this approach might keep you from spotting opportunities for significant improvements.

Expenses

For a nonprofit, the operating budget is the organization’s plan for the future. It shows how much revenue your operation plans on bringing in and how you plan on spending it. Using your mission statement as the guiding light, your operating budget guides your organization to fulfilling both its financial and philanthropic goals.

Allocate staff salaries, benefits, and taxes

If this is the first time you’re reviewing your own nonprofit financial ratios, you can use the calculations you found here as a starting point for your organization. However, when you’re able to interpret these numbers and use them to strengthen your financial strategy, your nonprofit can become more financially healthy and leverage additional funds for faster growth. Capital budgets typically span multiple fiscal years and often require specific fundraising campaigns or financing arrangements.

Start Fundraising

Instead of predicting revenue by individual grants or accounting services for nonprofit organizations line items, the cutoff method looks at revenue as a whole. To use this method, simply calculate the projected fundraising revenue by multiplying the estimated total amount with the probability estimate. For example, if you have it in your plan to buy new computers for your staff or to build a new website, create a separate budget for those projects. Consider segregating staff expenses as it usually comprises anywhere from 60% to 90% of an organization’s budget.

• The ultimate guide to selecting the best accounting and financial management software for your nonprofit.
• See how AI-powered collaboration helps finance teams align faster and drive clarity, ownership, and action across the business.
• Consult your auditor and CPA to identify the options that work best for your organization.
• Some expenses are assigned to the indirect category specifically, such as the audit.
• While it’s not a bad thing to spend money, you don’t want to be inefficient with your spending or spend too quickly.
• Our integrated approach empowers organizations to connect deeply with their audiences, expand their reach, and achieve measurable results—all without stretching their resources.

Once the organization’s major sources of income and expenses have been identified, the next step is to estimate the amount of income and expenses for the upcoming budget period. There is no one-size-fits-all answer to this question, as the steps involved in creating a nonprofit budget will vary depending on the specific organization and its financial situation. The budget should be maintained using cash flow forecasting, forecasting revenue and expense, and analyzing expenditures’ effectiveness. The budget should also include an analysis of all short-term, medium-term, and long-term financial forecasts. Once you have your budget, compare the predicted numbers to the actual figures every month in order to look for differences and establish why they occurred. When your organization is not in line with the budget, you should look at “why,” and what factors you can control or change.

• By doing so, you can keep an eye on your big-picture forecast with the assurance that every detail of your accounting is in order.
• Driver-based budgeting helps your nonprofit align its financial planning with operational activities, making adjusting to changes and improving decision-making easier.
• As I hope you now see, a lot goes into determining a nonprofit operating budget.
• However, most nonprofits are community-based and work with smaller budgets of less than $500,000 annually.
• To turn their visions into reality, nonprofits require a clear and comprehensive financial plan, and that’s precisely what an operating budget provides.

In this A-Z guide, you’ll learn the fundamentals of nonprofit budgeting, including key features of what makes for effective budgets. We’ll explore why budgeting is crucial for nonprofits and share 9 proven tips that successful organizations use to maintain financial stability while advancing their mission. A well-structured nonprofit budget serves as your organization’s financial planning roadmap, guiding decisions about Accounting for Churches program investments, staffing needs, and growth opportunities.

• This guide is designed to help nonprofits of all sizes master the art of budgeting.
• This will help ensure that your estimates are accurate and that you’re on track to reach your financial goals.
• Please do not copy, reproduce, modify, distribute or disburse without express consent from Sage.These articles and related content is provided as a general guidance for informational purposes only.
• While corporations focus on increasing revenue, nonprofit organizations are motivated to document their annual operating budgets to show that they’ve used funds responsibly and purposefully.
• Even if you don’t know exactly how much your organization will bring in each month, you still need to have some projected numbers to work with.
• Building operating reserves provides an additional buffer against temporary shortfalls.
• Use the same categories in your budget to easily generate financial reports to funders and others.

Determining and Allocating Expenses

But if you are coming up short, https://nyweekly.com/business/accounting-services-for-nonprofits-benefits-and-how-to-choose-the-right-provider/ you will need to reassess nonessential costs in order to bring your budget into alignment. Or decide how to increase your revenues in order to cover any shortcomings. This can include holding more events, applying for more grants or contacting major donors for more support. Either way, you need to cover the gaps, and having a solid statement will really help you find those gaps and better strategically plan ahead of time how best to cover them.

An annual operating budget, by definition, is a statement of expected revenues and expenses over twelve months. A budget is a guide that can help a nonprofit plan for the future as well as assess its current financial health. It is quite common to periodically review the budget as well as compare it to the actual cash flow and expenses, to determine whether they are playing out as expected during the course of the year. Nonprofits can keep tabs on their annual program revenue vs. expenses with this easy-to-use nonprofit program-based budget template. Enter fundraising, grant, and other income figures to compare your nonprofit’s current budget to your year-to-date actual revenue.

Program Efficiency Ratio

The best practices we shared in this guide are the fundamentals of sound budgeting for nonprofit organizations. Operating budgets reflects the organization’s planned financial activities for the year ahead, showing how much revenue it expects from which sources and how much it will spend on operations. It’s a key tool in effectively and efficiently achieving the organization’s stated purpose, and should always align with an organization’s strategic plan. The operating budget must be centered around the primary goals and objectives of the organization. When creating your nonprofit operating budget, use the past as a benchmark for your expectations and goals in the coming year. By analyzing your previous year’s budget, you can get a clear understanding of your organization’s financial needs and how they may have changed over time.