Creating an Effective Nonprofit Operating Budget in 6 Steps: A Comprehensive Guide

​ Effective budgeting for non profit organizations is essential to achieving goals. Creating budgets for your nonprofit programs in addition to an overall budget for your organization can seem like overwhelming tasks. Budgeting requires careful record-keeping, evaluation of the past, consideration of the future, and a thorough understanding of your organization’s current context.

Adequate research and realistic cost estimation

We recommend setting aside at least 5-10% of your annual budget for emergencies. Nonprofits are recommended to have general liability (premise), commercial automobile (non-owned/hired), and directors and officers (D&O) liability coverages. If you have started a new nonprofit, you will still need to create a budget. This can be a daunting task for a new nonprofit because you do not have history to review, but there are some tips that can help make it easier. Historical budgeting simply means using the previous year’s budget as a starting point for the coming year’s budget. This can have some advantages, as it can be easier to get an idea of what has been spent in the past and can accounting services for nonprofit organizations help to predict future spending.

• Finally, update your template periodically to reflect changing organizational needs and industry best practices.
• Let’s dive into the details of a nonprofit operating budget—what it is, what to include, and how to put it all together.
• It’s important to have all of your financial reports and receipts in order so that you’re ready for a state or IRS tax audit process.
• A percentage higher than this might indicate spending that’s disproportionate to the amount of money a group can raise.

What are the different types of nonprofit budgets (Operating, Cash Flow, and Capital)

Budgeting for nonprofit organizations takes a bit of time, but planning your budget is too important to make the mistake of rushing through it. Keep adding to these tips and best practices and you’ll have the process down in no time. Administrative costs is typically another large category for nonprofit organizations.

steps to build a nonprofit budget from scratch

The natural expense method categorizes costs according to the nature of payments made, while the functional expense method categorizes expenditures based on how they further your organization’s mission. Although considering natural expenses is helpful during the planning process, your final budget should use functional expense categorization to match https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ your financial reports. A common misconception about nonprofit budgeting is that because nonprofits by definition can’t turn a profit, their operating budgets always have to break even.

Which Taxes Do Nonprofits Pay?

• That means that you’re spending 10 hours, or 25% of your 40 hour work week at the program.
• Below, we explore the major challenges of a nonprofit budget proposal and provide real-world examples of how organizations have successfully addressed them.
• Understanding these fixed expenses is critical for effective nonprofit financial management.
• But if you are coming up short, you will need to reassess nonessential costs in order to bring your budget into alignment.
• It’s especially important for nonprofits that may have irregular income streams or seasonal fluctuations in donations.
• Creativity is key to keeping your fundraising campaigns fresh and engaging.
• This nonprofit startup operating budget template features sections for total one-time startup expenses, monthly expenses, and total funds required to operate.

The nonprofit operating budget is essentially the financial reflection of what the nonprofit business expects to achieve over a 12-month period (annual budget). Calculating and analyzing the true cost of programs and activities can be completed as a one-time project or implemented as an ongoing management practice, as we recommend. If that is the goal, it’s worthwhile to make sure that the program and cost definitions match the setup of your accounting system. Any accounting software can be used to maintain program-based financials, but they each have their own structure and terminology. One benefit of structuring accounting this way is that you can control your chart of accounts – the list of income and expense categories.