When it comes to making a budget for your nonprofit, it can seem like there is little to guide you. This can be especially true for new nonprofits whose budget is more like a best guess than a best estimate. If you are in this position, don’t panic… making a budget is often more art than science.
In this podcast, I talk with Rick Sluetaris who is a co-director at Open Connections in Pennsylvania. When he first started working there they had an income of $300,000 but no budget. No one was tracking where the money came from or where it went. When it came to giving employee raises or buying equipment it was simply a matter of seeing if the bank account could cover the cost.
Rick talks about the steps they took to create a budget and start tracking their finances. This gave Open Connections an annual budget with guidelines to help them spend money relevant to their goals.
Creating your Budget
If you have been tracking your income and expenses then you are off to a good start. This will make it easier to project what will be needed in the months and years ahead. If you haven’t been tracking your finance (or if this is your first year) then your projected budget really is just a best guess.
Income for a nonprofit comes in the form of grants, gifts/donations, product sales, service fees, endowments and/or membership fees. This is usually the easiest part of the budget to create. Just calculate what you took in last year and project it forward a year. The trick is to be conservative.
If you had $10,000 in donations then it is likely you can reach that number again (unless you have had staff/volunteer turnover or have suffered a loss of reputation). So it would be reasonable to expect $10,000 to $11,000 in donations in the new budget. Like I said, be conservative, a 2-5% increase is usually a safe number. It is easier to meet and exceed conservative estimates and helps you plan realistic expenditures.
Keep projecting your income in a similar fashion for each line item. Take the known amounts and adjust them according to your best prediciton of the future. Obviously, new or expiring grants can have a significant impact on your bottom line. So be sure to account for these dramatic increases (or decreases) in your income.
If this is your first year budget and you have no numbers to work with, then do your best to come up with honest and conservative “guestimates” of your income.
This is where tracking is really important. An honest budget is a tracked budget. Your expenses will include utilities, maintenance, office supplies, salaries, insurance, equipment, rent/lease, etc. Even if you are a sole social-entrepreneur paying for everything out of pocket, you still need to track these expenses. It is important to know a realistic cost on what it takes run your nonprofit.
Your expenses should be adjust for inflation, so adding an extra 2-3% is pretty common practice.
Once you have your list of projected incomes and expenses created it is time to figure out your net income.
This is pretty simple math. Your gross income is all of your total income. Let’s say $20,000. That may be a great number unless your total expenses is $30,000. In this case you would be operating at a loss. Your net income (gross income minus gross expenses) would be -$10,000.
Don’t panic if you have a negative net income. If the difference is only a few thousand dollars you can go back and adjust some of your income and expenses to try to narrow this gap. If this is your first year in existence, then it may mean running your nonprofit at a loss for the first several years until your income can catch up with your expenses.
Remember, You’re Rembrandt
Creating a budget can be fun. It is useful to see the financial health of your organization. And it takes just as much creativity to make a budget as it does basic math. Just remember, a budget is a living document and should be visited several times throughout the year. It is not written in stone. If you see that you need to increase an expenses due to fuel prices, then make the necessary adjustments to cover this new increase (either increase a revenue item, or cut an expense).
So get out your paint brush (and calculator). It is time to make your budget.
Open Connections: openconnections.org
Tech Soup: techsoup.org
Tech Soup Canada: techsoupcanada.ca
WaveApps Accounting Software Overview: nonprofitally.com/nonprofit-accounting-app