Your nonprofit budget is one of your most strategic tools as a nonprofit. It brings clarity and definition to your programmatic planning. If done well, your budget allows you to plan for the long term sustainability of your organization.
Most nonprofits, however, struggle to create a truly useful budget. A nonprofit budget should include two important characteristics: it should be “program based”, and it should utilize “shared operating costs”.
Program Based Budget
A program based budget for your nonprofit allows you to see the sustainability of each of your programs and builds a solid framework for tracking and raising restricted funds. If you visualize a standard budget you probably see your income and expense accounts with totals for the year. A program based budget includes income and expense totals not just for the organization as a whole, but for your programs as well.
Breaking out programs separately allows for many benefits. First of all, it allows you to see the bottom line for each of your programs. Some programs may be fully funded by grants, while others may be using most of your unrestricted dollars. This information is essential in planning your spending and fundraising.
Second, a program based budget allows you better track your restricted dollars. If you receive a program specific grant, you need to make sure that you spend that money down through the year and not use those restricted dollars to subsidize any other program. With a program based budget you can ensure that all restricted income has associated expenses. You can then track your budgeted grant against your actual spending.
Another important benefit of a program based budget is that it can inform your fundraising efforts. A program that has more expenses than restricted income may provide a great fundraising opportunity. You can show the planned expenses and the impact as well as your funding situation. The budget for a grant proposal is already halfway done.
Shared Operating Costs/Indirect Costs
Too many nonprofits struggle to get funding for things like the rent and internet. This isn’t just because funders are more attracted to the sexier direct program costs. The problem also lies in how nonprofits distinguish program costs from overhead and don’t utilize shared operating costs in their grant budgets.
A portion of your rent, your internet, salaries, and even your printing paper should be allocated to each of your programs. These are considered “Shared Operating Costs” or "Indirect Costs". This is not a sneaky workaround: this is the appropriate way to do things according to the Generally Accepted Accounting Principles (GAAP) published by the IRS.
By using shared operating costs in your nonprofit budget, you can see the actual cost of running a program. By having the full and accurate costs of each program, you can then raise the appropriate amount of money from funders and not be left scrambling to raise money for the rent. You have the numbers so that you can include these costs in your grant proposals. This is not "overhead", these are actual programmatic costs.
The other benefit of using shared operating costs is that it helps you report to the IRS on your 990 a clear and positive breakdown of your functional expense. More and more nonprofits’ finances are being scrutinized by funders on GuideStar and other services. Using shared operating costs helps you get your Program costs to 80-85% of your spending.
The Joy of Budget to Actuals
There are so many benefits to an accurate budget, but one of the most immediate is the knowledge and peace of mind you get from seeing your budget to actual reports as the year goes on.
You and your board are able to see how you’re doing with your spending and fundraising. Are you raising what you planned? Are you spending more than planned? Instead of blindly pushing through the year, you can routinely check your map and make any necessary changes.
There is much more to say about this topic, so stay tuned for more financial management resources coming soon such as “ how to do a financial report to your board” and “how to track shared operating costs”. And remember, if you have any questions on this please post below, or feel free to give me a call for a free consultation.
Joe Golinveaux is founder of Mighty Nonprofits, a company providing bookkeeping services for small and medium sized nonprofits.