4 Nonprofit Budgeting Tips to Promote Financial Health

As a nonprofit professional, you likely focus on fundraising and programming as the main activities that further your organization’s mission. However, financial planning is also a critical (and often overlooked) piece of that equation—after all, your nonprofit can only engage supporters and make a difference in your community if you use your resources wisely!

Budgets are among the most important financial planning tools for nonprofits like yours, since they outline the funding your organization will bring in and spend for a given year or initiative. While you don’t have to be an accountant or financial advisor to run a nonprofit, any professional in the sector should have at least a basic understanding of budgeting to help keep your organization’s revenue generation and expenditures on track throughout all of its activities.

In this guide, we’ll walk through four budgeting tips you can use to promote financial health at your nonprofit. No matter your role, these essentials will help you get a better grasp of your organization’s finances through Financial Literacy Month and beyond. Let’s dive in!

1. Understand the Different Types of Nonprofit Budgets

Your organization’s operating budget is a cornerstone of nonprofit financial management. This is the master plan that lays out all of your revenue and expenses for a full fiscal year.

However, Jitasa’s nonprofit budgeting guide mentions a few other types of budgets you should be familiar with, including:

• Capital budgets, which detail the expenses associated with large-scale, multi-year projects (like capital campaigns) and the funding you’ll use to cover them.

• Program budgets, which outline the revenue you’ll use to launch a new mission-related community program and the various needs you’ll spend it on.

• Event or campaign budgets, which list the upfront costs of highly involved revenue-generating initiatives like your GivingTuesday campaign or auction events to ensure you can cover or offset them.

• Grant proposal budgets, which explain how you would use the funding from a grant you’re applying for to demonstrate to the grantmaker that you’ll manage the grant effectively if you win it.

For this article, we’ll focus primarily on operating budgets because of their central role in nonprofit management. However, don’t be surprised if you encounter the other types of budgets in your work—and if you do, keep in mind that they should always align with your operating budget.

2. Set Clear, Data-Driven Goals

Generally speaking, all effective nonprofit budgets have the following characteristics:

• Defined activities. Your organization’s operating budget and strategic plan go hand in hand. All of your expenditures should (directly or indirectly) get you closer to achieving the overarching goals in that plan, which your revenue will allow you to fund.

• Specific time periods. The overall timeframe of your operating budget should be one fiscal year, whether your organization follows the calendar year like most nonprofits or uses an adjusted timeline (e.g., educational organizations’ fiscal years often run from July to June to align better with the school year). However, it’s also important to consider when you plan to spend and bring in certain funds—for example, you’ll likely raise the most individual donation revenue near the end of the calendar year. 

• Realistic metrics. Clearly list projected dollar amounts on both sides of your budget. When setting revenue goals, choose targets that are high enough to push your team but still reasonable enough to achieve. For expenses, think critically about what spending is truly necessary for your nonprofit to thrive and whether you can realistically cut some costs without sacrificing quality in service delivery or operations.

Data is your best friend during the budgeting process. Review your financial records, donor data, past campaign results, and any other relevant information to ensure you can stick to your budget and use it effectively. If you need help with this process, outsourced nonprofit financial professionals like accountants, controllers, and fractional CFOs can expertly analyze your data and forecast cash flows for improved accuracy.

3. Categorize Revenue by Source

Once you’ve set some general goals, it’s time to lay out the more specific, practical aspects of your nonprofit’s budget. The best way to organize the revenue side is by source, since this method will help your budget to align with your organization’s financial records and reports (financial statements, tax returns, etc.) and allow you to assess your funding model more effectively.

Here is a quick overview of the five major categories of nonprofit revenue to include in your budget and some funding sources that fall into each category:

• Individual donations: Small, mid-level, major, and planned monetary gifts; event revenue; in-kind donations of goods, services, and assets (real estate, stocks, etc.)

• Corporate philanthropy: Matching gifts, volunteer grants, sponsorships, internal employee giving campaigns

• Earned income: Membership dues, merchandise sales, fees for services provided (e.g., animal shelter adoption costs)

• Investments: Interest generated from endowment funds, treasury bills, bonds, mutual funds

• Grants: Federal and state government grants; public, private, and family foundation grants

One of the most common misconceptions about nonprofit budgeting is that because nonprofits can’t turn a profit by definition, their operating budgets have to break even every year. However, the term “nonprofit” just means that you need to reinvest all of your funding into your organization, either by spending it or saving it for the future. So, if you can budget for a revenue surplus to create a safety net for emergencies and grow your reserve funds, do it!

4. Organize Expenses by Function

On the expense side of your budget, the most effective organizational method is functional expense categorization. Besides also aligning with required nonprofit financial reports, this system makes it easier to see how your organization’s spending furthers its mission. 

The three categories of functional expenses are:

• Program costs, which are directly related to your nonprofit’s mission and vary widely between organizations—ranging from gallery setup and maintenance at an art museum to beach cleanup supplies and educational materials about recycling for an environmental nonprofit.

• Administrative costs, which keep your nonprofit running day-to-day and include things like utility bills, office equipment purchases, and staff compensation (which, as Astron Solutions’ employee compensation guide explains, should factor in the cost of benefits like health insurance and paid time off along with salaries).
• Fundraising costs, which include the upfront costs of revenue-generating initiatives, such as event planning, merchandise production, marketing, consulting fees, and purchases of specialized fundraising software.

Another widespread nonprofit budgeting myth centers around overhead expenses, a term that refers to your organization’s administrative and fundraising costs combined. Overhead often has a negative connotation because some donors historically believed that it hindered nonprofits’ mission-related progress. Today, attitudes around overhead are changing as nonprofit professionals and supporters alike realize that organizations need to run fundraisers and keep their lights on to make a difference in the community.

However, this doesn’t mean your nonprofit can incur unlimited overhead, and mission-critical spending should still be your top priority. If you need to cut costs while budgeting, start by finding reasonable ways to reduce your administrative and fundraising expenses (for example, looking into free marketing tools or creating a wishlist of new office equipment so supporters can donate it to your organization in-kind) before taking funding away from your programs.

Once your nonprofit has created a budget and your board of directors has approved it, your work isn’t finished yet! Check in with your budget regularly to keep your spending and fundraising on track all year long. If your actual numbers deviate from the plan, discuss the situation with your team to determine why that happened and how you can proactively adjust your strategy to maintain your organization’s financial health long-term.

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