How to Budget for a Not for Profit Organization

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To remain viable, nonprofit organizations must operate with an organizational budget, just as any other type of entity must. The budget will reflect the income the organization expects to earn through the year and how that money will be spent. Having a budget approved by your board of directors provides a fiscal road map for your organization.

Things You'll Need

  • Lined paper
  • Pencil
  • Calculator
  • Report of financial activity from prior year
  • Estimated income
  • Estimated expenditures

Gathering Data

  • Establish your organization's fiscal year. Depending on the nature of funding that your organization receives, the fiscal year may run from January 1 through December 31, July 1 to June 30, or another date that best fits your organization's funding flow. The due date for your tax filings with the IRS will be dependent upon the ending of your fiscal year. Fiscal years should remain the same each year.

  • Collect all available data on income and expenditures during the previous fiscal year. Use accounting software containing data to create Annual Profit & Loss Statements and Balance Sheets to help you understand your organization's financial position and use of funds.

  • Use a pencil and paper, or a Microsoft Excel-type spreadsheet to record all of your operating expense categories in one column. For an organization creating its first budget, categories or "operating accounts" may be developed to match the reporting requirements on IRS Tax Form 990, or customized to best meet your financial tracking needs.

  • Write down all of your income categories in another column. Include all of the types of sources that your organization receives money from. Common income includes grants, donations, pledges, fundraisers and fees for service.

Create A Budget

  • Review your data to determine the amount of income that each income category brought in during the previous fiscal year. Consider whether you anticipate income sources to increase, decrease or remain consistent. Based on your conclusions, estimate and record a realistic amount that each income category will produce in the upcoming fiscal year.

  • Evaluate the data for expenditures during the previous fiscal year. Consider annual recurring expenses, expanded or reduced operations and any major purchases. Estimate and record a realistic amount that will be expended in each expense category in the upcoming fiscal year.

  • Calculate and record the total estimated income and expenditures. Include any anticipated reserves in your income calculation. Be sure that there is not a deficit between your budgeted income and expenses. Operating with a deficit does not allow your organization to build up a reserve, which can be used for emergencies. Ideally, small to mid-size nonprofits should retain a reserve that is equal to 25 percent of their annual operating budget.

  • Adjust expenditures, if necessary, to eliminate any deficit created by your estimates.

  • Review the draft budget with the organization's board of directors. Use any feedback to modify the budget to best reflect your organization's financial goals and limitations for the upcoming year. Ask the board to approve the budget. Use the final budget as a guide to spending limitations and income goals to avoid fiscal shortfalls. Compare your budget to actual expenditures and income no less than once each quarter.

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References

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