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Thursday, December 5, 2013

5 Simple Steps to a Better Nonprofit Budget


Preparing your nonprofit’s annual budget is probably one of the least appealing parts of your job. Following these five simple steps can help make the process a little less painful.

1. Count your chickens. Before you start allocating resources, you need to understand what they are. This includes not only the amount of your income, but its nature. Restricted or planned gifts aren’t necessarily available for spending.

2. Get with the program — costs. With the input of staff and board members, determine the costs of current programs and what your nonprofit expects to offer in the next year. Be careful not to underestimate needs. Make necessary adjustments to the previous year’s expenses for inflation and other higher costs that may disproportionately affect your nonprofit. For example, if gas prices are rising quickly and you rely on vehicles to deliver services, your program expenses could be considerably higher next year.

3. Pay attention to other expenses. List your direct expenses, breaking them down into specific line items. Payroll is probably the largest item — likely at least 50% of total expenses. Add to current salaries any expected salary increases and payroll taxes and benefits. Incorporate any payroll tax rate changes and legally mandated changes to benefits, such as certain expansions to health care coverage. Other direct costs may include rent, utilities, supplies, equipment maintenance, insurance, contracted services and transportation.

Account for indirect expenses as well. These are expenses benefiting multiple programs — such as fundraising and management expenses. Examples of such costs are payroll for business management, recordkeeping, grant requests and financial reporting. You may have to allocate salaries for certain positions to multiple categories.

4. Play with the numbers. What you have at this point is a rough draft. You’ll need to make at least some adjustments to your numbers, assumptions and plans before getting to where your staff and board want to be — whether that means you break even, spend from reserves earned in prior years or plan for a surplus.

Be sure to compare your budget to last year’s and to the actual results, paying attention to large variances. An unanticipated one-time event might explain going over budget. But if you don’t have that excuse — and have gone over budget repeatedly — you probably need to be more realistic about your nonprofit’s income and expenses.

5. Ask for direction. Don’t hesitate to get assistance if you need it. Professional accounting help is always a good idea, but it’s critical when:

  • This is the first time you and your staff have prepared an annual budget,
  • Your nonprofit is struggling financially,
  • Your nonprofit is growing rapidly or has undergone major mission, programming or funding changes,
  • Your organization saw significant variances between last year’s budgeted and actual results, or
  • You don’t have financial or accounting expertise in-house.

Board members may be able to help you prepare an effective budget. But if you’re uncertain, get expert advice. After all, your annual budget is the first step toward current and long-term financial stability.

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