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Refresh Your Organization’s Budgeting Process with These Tips

As we enter the fourth quarter, many nonprofit organizations are getting more specific about their financial plans for 2013. In the scramble to produce a budget in time for year’s close, leaders sometimes lose sight of the larger purpose behind the planning. A budget is more than just an articulation of how an organization makes and spends its money. Done well, a budget serves to:

  • Make the business case for mission-related goals
  • Provide an organizational road map to align staff
  • Intentionally allocate resources among competing priorities
  • Monitor actual performance against plan to inform action

Developing a thoughtful, fact-based budget that resources your programs while contributing to a healthier organization doesn’t have to be hard. In this post, we share a few budgeting principles and tips to guide you through the planning process.

Strategy comes first. In NFF’s experience, organizations too often use the annual budgeting process to drive their strategy, when really, the reverse approach is needed: a nonprofit’s mission and business objectives should always steer its budget. A good financial plan takes stock of where an organization is today and reflects its operating and program priorities for the years to come. It provides leadership with the data to track progress toward strategic goals and ultimately, to make course corrections when the situation demands.

Look to past performance to ground your plan in reality. It’s helpful to base future budget decisions on more than one year of financial history. When examined over time, trends in revenue and expenses can illuminate areas of volatility, growth and poor performance. By scrutinizing a few years of recent financial information, nonprofit leaders can answer questions such as: What are our sources of reliable revenue and which income streams are less predictable? Which expenses drive our overall cost structure and how have they changed over time? Are we generating surpluses to contribute to savings?

Through a partnership with GuideStar, NFF recently launched Financial SCAN, an easy to use and affordable online tool that can help nonprofit leaders conduct a multi-year analysis of financial performance using Form 990 financial data. Running a Financial SCAN report on your organization provides a clear, comprehensive picture of your organization’s recent financial past, offering real financial data points to guide choices that can be reflected in your budgets.


Consider future goals to keep current plans aligned with strategic direction. By consistently anchoring budget decisions in the past without consideration of the future, you run the risk of creating stagnant plans or reflecting over-zealous ambitions. The budget decisions your organization makes today should reflect your broader program and organizational goals and objectives. What business and mission priorities will you set this year to help move closer toward your longer-term goals? How will these priorities and the activities they require translate into revenue and expenses? What investments will you need to make in your balance sheet so that you have the cash you need to manage the risk or unpredictability in your strategy? Every year provides an opportunity to make progress on your organization’s strategic goals by reflecting them in the budget.

Let’s get tactical: Recommendations for a sound, strategic and manageable budget.

  • Budget for unrestricted surpluses. While we encourage organizations to be conservative in their budgeting, aim for finishing the coming year in the black. Budgeting for breakeven leaves little room for chance, when we know that each year brings unforeseen circumstances. Planning for a surplus allows for some margin for error. Be sure to include depreciation in your expenses even though it is a non-cash expense. Aiming to cover depreciation in your budget can contribute to a cash surplus that can be saved for future use to pay for replacement or repair of depreciated assets. Lastly, make sure to include only unrestricted revenue(and/or revenue that will become unrestricted in the next year) to cover operating expenses.
  • Don’t plug revenue with mystery funds. Build your budget with revenue that is already committed or has a high likelihood of materializing based on past performance or known new relationships. Developing a separate pipeline of additional fundraising prospects and revenue opportunities keeps less secure funds from de-stabilizing your budget, while still recognizing the value of new leads.
  • Distinguish operating revenue from capital. Funds that are earmarked for capital purposes like facilities, endowments, or growth, should be pulled below the “surplus /deficit” line (or reflected separately in a capital budget) to provide a clear view of operating performance. Conflating capital dollars for episodic purposes with the regular revenue that reliably covers ongoing expenses can mask the true financial performance of your organization. See NFF’s Financial Reporting Done Rightpublication for more information and suggested examples for presentation.
  • Consider the balance sheet. The balance sheet provides a window into resources available to be used for a rainy day, pursue a new strategy, or adapt to changes in the environment. Nonprofits have expenditures and savings needs that go beyond the direct and indirect expenses that appear on their income statements. Setting annual revenue targets high enough so that your organization can repay debt principal on schedule, address the wear and tear on fixed assets, and/or add to reserves ensures that the budget is investing in the longer-term resource needs of the organization. Our Financial SCANtool can illustrate your organization’s estimated full costs and reveal balance sheet trends in its multi-year dashboard and graphs.
  • Plan opportunities to compare actuals to budget and then re-forecast.Fundamentally, a budget is just a plan. And all too often, circumstances don’t go exactly according to plan, so expect your budget to change. NFF suggests reforecasting your organization’s budget at least once a quarter based on actual performance to date and newly available information. Ensure that a process is in place for how re-forecasts will be conducted and clearly communicated to staff and the board.
  • Remember, management not budgets drive financial performance. Even the best budget and reforecast will only get you so far. Financial plans are meaningless if the leadership and discipline aren’t in place to take action when performance setbacks occur. Many organizations find it helpful to develop and share with leadership a set of financial “triggers” – events (e.g., (the loss of a major donor) that will provoke a set of pre-determined decisions (e.g., a particular expense reduction) if circumstances go awry.

At the end of the day, strong programs depend on strong finances that ensure your organization can pay for the people, infrastructure and activities supporting mission execution. Developing a financial roadmap, backed by decisive leadership, can help ensure that your organization can advance its mission next year – and in the many years to come.

What budgeting tips have you employed to improve your annual plan? We encourage you to share your additional tips below.

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