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Budgeting Isn't Brain Surgery

Adapted from Starting and Building a Nonprofit

Budgeting is the process of estimating how much money you'll need to pursue your goals and carry out planned activities, and how much money you expect to collect from fundraising, events and other sources. You'll need to draft an initial budget early in your start-up days to get a clear sense of what specific activities will cost and to help you determine how much money you'll need to keep your group afloat.

At its most basic level, a budget is simply a list of:

  • estimated income, including how much you think you'll reap in grants, contributions, activity fees, sales, and so on; and
  • estimated expenses, including what you expect to spend on day-to-day expenses like postage and office supplies; capital expenses like computers and office furniture; and start-up expenses.

Once you tally your expected income and expenses, you'll be able to see whether your nonprofit will have enough money to cover all of your future activities, or whether you'll have to scale back your plans and/or figure out a way to bring in more money to make the numbers work.

It's easiest to draft an initial budget after creating your strategic plan. With a strategic plan in place that outlines your activities in detail, making estimates for components of those activities should be pretty straightforward. If, like some nonprofits, you are already engaged in activities and haven't yet created a strategic plan, you might want to draft a budget right away, to keep you on track financially until you do write a strategic plan. Once your strategic plan is in place and your activities are more carefully defined, you can amend your budget accordingly.

You don't need any special financial software to draft a budget, although many accounting programs offer budgeting features. If you plan to purchase accounting software such as QuickBooks or MYOB to manage your nonprofit's finances down the road, you might consider using it for your budgeting process as well. Otherwise, you can draft a budget using simple spreadsheet software such as Microsoft Excel. All you need is the ability to create rows and columns into which you can enter your figures.

A budget includes the following components:

  • estimated income, including both restricted and unrestricted income
  • estimated program and administrative expenses, divided into categories that will work for accounting and tax preparation purposes
  • estimated capital expenses, for long-term assets like computers or vehicles, and
  • estimated start-up costs.

Here's a quick overview of the simple steps in drafting a budget.

1. Set Up Your Budget

Your goals in budgeting are to ensure (1) that the nonprofit is in the black overall, and (2) that each individual program has adequate funding to keep running. To achieve both goals in one budget, you should set up the budget to track both overall funds and funds for specific programs.

2. Estimate Income

To begin, you'll have to budget expected income: how much money you plan to bring in from various sources. Nonprofits typically earn income from membership fees, individual contributions, grants and special events. Create rows in your budget for each type of income you expect.

3. Estimate Expenses

Once you've estimated your income, you'll have to figure out how much your nonprofit plans to spend. You’ll need to divide these expenses into basic categories: regular (day-to-day) expenses, capital expenses and start-up expenses. These divisions will help you prepare your tax returns and balance your books. In addition, you'll need to allocate each of your expenses either to an individual program or to administration.

4. Assemble Your Budget

Once you've estimated all of your income and costs, your final task is to compile them into one master budget. This budget will allow you to see whether your nonprofit will be able to carry out all the programs and activities you want to tackle. If your budget shows that your expenses will exceed your income, you'll need either to scale back your plans or to figure out how you'll make up the shortfall.

Don't put off preparing your first budget. Many fledgling nonprofits tend to procrastinate when it comes to budgeting, often because they are intimidated by the process or afraid of the financial realities it will reveal. In fact, budgeting is not difficult -- it simply involves breaking down your activities into individual components, then making estimates of what each component will cost. Budgeting is an essential step in getting a handle on the financial resources you'll need to make your group successful. Remember the saying, "Knowledge is power." Understanding exactly how the numbers break down will allow you to make informed decisions that will help you keep your core programs up and running.