Nonprofit Financial Management Best Practices

For a nonprofit entity, the budget serves as a guide to manage resources each month. Budgets are generally prepared by the management of the organization and reviewed and approved by the board of directors. The budget will include all types of revenue and expenses. Since things can easily change, the budget doesn’t have to be set in stone; it can be adjusted throughout the year if needed based on circumstances.

A budget also doesn’t need to be a break-even budget. A slight profit for the year can help with funding future reserves. A loss for the year isn’t always a bad thing either if there is sufficient cash to help supplement the shortage going forward.

Several key line items can be easily projected for a budget such as fixed costs (debt payments, monthly rentals, utilities, phone, and subscriptions that are generally the same each year, etc.). Other one-time costs can be easily budgeted for (a new contract for services, purchases of equipment, etc.).

Variable costs can be projected based on past expenses and taking an average over the years. However, consider the circumstances of your variable costs, too. What if you typically budget for payroll based on an estimated salary increase of a certain percentage each year, but you know that a long-time executive is retiring? What is the expected total compensation for their replacement? These circumstantial factors along with inflation can impact payroll estimates and other key variables in the budget.

When projecting revenue, an organization can start with its common revenue sources. For example, a foundation that makes an annual pledge for the year or the expected revenue from a gala fundraiser can be estimated in the budget.

An organization will be most successful if the budget is realistic. For example, don’t overestimate revenue if you are unsure of certain revenue sources. Eliminate any previous revenue sources that will not continue such as one-year grants or one-time donations. Also, build in a cushion for unexpected expenses such as repairs and maintenance expenses or increases in professional dues, taxes or interest rates on debt.

Why is it important for a nonprofit to have a budget?

Budgets have various purposes, and therefore are important to a nonprofit for several reasons. Some of those benefits include the following:

• The budget predicts the amount of money coming in each period, and therefore your organization can set goals for development, operations and staffing.
• A budget helps to achieve short-term and long-term goals of the organization by allocating funds to high-priority initiatives beyond overhead.
• A budget allows for an organization to compare the budget to actual each month. This is good information for the board of directors and management of an organization to know how money is being spent/not spent and if adjustments need to be made. It also helps leaders say no to certain requests that don’t fit the budget priorities.
• A budget supports organizational transparency among leaders and stakeholders.
• A budget can help leaders manage the financial aspects of an organization to assist in cash flow, financing and new expenditures as well as paying off debt.

Do you need a nonprofit cpa firm to help you with budgeting? Even if your budget is set for the year, you can benefit from nonprofit consulting. Reach out to Assurance Solutions Team Associate Director T.J. Sheldon or contact the Assurance Solutions Team at Mahoney.

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