What is a NP Budget and Why is it Necessary?

What does it mean when someone suggests preparing a budget? The dictionary definition of a budget is, “an estimate of income and expenditure for a set period of time”. This set period of time can be for a month, a year, or whatever the time frame is meaningful to your organization.

For a nonprofit organization, the budget acts as a crucial tool for managing the resources on a monthly basis. Typically, the management team prepares the budget, which is then 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 if there is sufficient cash to help supplement the shortage. 

Several key line items can be easily projected for a budget such as fixed costs (debt payments, monthly rent, and utilities, phone, and subscriptions which are generally the same each year, etc.) and other one-time costs be easily budgeted for (a new contract for services, purchases of equipment, etc.). Other variable costs can be projected based on past expenses and taking an average over the years. Expenses such as payroll can be budgeted based on an estimated salary increase of a certain percentage each year. As for revenue, an organization may have an idea of which foundations are planning to make their annual pledge for the year, how much a gala might earn based on the previous year revenue, etc.

What is the importance of a budget for a nonprofit?

Budgets have various purposes and are vital to a nonprofit organization for several reasons. Some key benefits of having a budget are the following:

• The budget predicts the amount of money coming in each period and therefore your organization knows how much more in contributions you might need to solicit for, or how much cash your organization should adjust spending each month to hit your goals.
• A budget helps achieve short and long-term goals of the organization.
• 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.
• A budget can provide the organization with a goal for a fundraising event.
• A budget can help manage the financial aspects of an organization in order to assist in getting out of debt.

An organization will be most successful if the budget is realistic. Your organization will want to keep that mind when preparing your budget.

For additional considerations, please reach out to Assurance Solutions Team Associate Director, T.J. Sheldon, or contact the Assurance Solutions Team at Mahoney.

Next: Nonprofit Financial Management Best Practices