Budgeting: What to Know & Where to Start

Budgeting…most nonprofits we know loathe the word because it signals lengthy processes, lots of meetings, confusion, headaches, tension between team members, and a cumbersome final document that may or may not be useful to your organization. 

But it doesn’t have to be that. Budgeting is a useful exercise for all nonprofits, but it should be the right size project for your organization, depending on your size and how many years you’ve been in business. In other words, the complexity of your budget should reflect the complexity of the organization. 

A budget is not independent of the reality you exist in. It should reflect your organization’s current reality in regards to size, programming, and complexity. 

We wrote this guide to help nonprofits expand their thinking about how to approach budgeting and hopefully remove some of the friction points that make budgeting…less than fun. 

For Organizations Working on Their First Budget

If you don’t already have a working budget, a great approach is to commit to being iterative in the beginning. There’s a 0% chance that you’ll get it right the first time–there are too many factors outside of your control, funder decisions, for example. So, it can be good to acknowledge this from the beginning and revise the budget quarterly until your leadership team has an instinct for your organization’s income and spending tendencies. Putting too much energy in your first budget can be a waste of time and money. 

For Smaller Organizations

If your nonprofit has a small team and a handle on the money you don’t need to spend a lot of time budgeting. Think through how many programs, subcategories, and budget lines you genuinely need to include. More is not always better on a budget because it increases the complexity of both bookkeeping and board reviews. Instead, choose only what is meaningful and important to your organization. 

For example, I was working with an organization that hosts an annual volunteer retreat. In their budget they had three separate line items pertaining to the retreat: 

• Volunteer Lodging
• Volunteer Travel
• Volunteer Food 

The question is, do your board members, your funders, and YOU genuinely care about the breakdown of the spending on your volunteer retreat, or could these be combined into one line item that represents the total costs of the retreat? Only you can say, but it’s helpful to develop a good eye to spot inefficiencies on a budget. 

For Larger Organizations

If your nonprofit is larger or growing you may require a more complex budget. In addition, you might have more predictability in your income, spending, and budgeting process. Larger organizations run the risk of going through the motions of budgeting without seeing it as a strategic opportunity. Re-examine your process each year. Ask yourself, what is the reason for each expenditure? Do the same conditions exist as when we originally allocated this funding? What has changed since then? 

Budgeting Process and Roles 

Part of what makes budgeting onerous is that many people within your organization need to be involved in the process: 

• The Finance Team, which most often includes the executive director, the director of finance, and any other finance staff, should take leadership on the budgeting process. Start a few months before the start of your fiscal year to leave ample time for iterations and the approval process. 
• Program Staff who are on the ground, implementing the program and know its true cost need to be involved from the get go. Ask program staff early to submit budget items and their justification. Every line item should help advance your mission. 
• The Executive Team needs to have a thorough understanding of the budget so that they can get behind it before it is handed up to the board level. 
• The Board need not be part of creating the budget but should gain a thorough understanding of the budget and the rationale behind it before approving it. 

There are many tools at your disposal to create your budget. One, newer option is to use AI to assist in the budgeting process. We encourage nonprofits to try AI tools. Claude is especially good with spreadsheets. One thing to keep in mind is that AI tools tend to produce overly complicated budgets and financial models. If your nonprofit is smaller, be strategic with your prompting so that you get a simple but that you can maintain on your own. 

Components of a Budget

One of the most important concepts to keep in mind when budgeting is restricted versus unrestricted funding. While you may have the cash in the bank to spend, it may be restricted to certain line items. Restricted and unrestricted funding should be shown separately on a budget. 

Many organizations create several smaller budgets that feed into the overall budget. One good approach might be to make each of these budgets an independent sheet in your spreadsheet, then have an overall summary budget sheet that combines them. These might include: 

• General Operating Budget (This includes your overhead costs like rent, utilities, taxes, office supplies, and equipment) 
• Fundraising Budget (This includes anything spent directly on fundraising like event expenses, appeal mailings, a CRM, etc.)
• Program Budget (or, for larger organizations, a budget for each program) 

Every budget has two main sections: Income and Expenses. The Income section should delineate your organization’s sources of income in categories that are meaningful to your organization. These might include: 

• Government Contracts & Grants
• Foundations & Grants
• Individual Donations
• Sponsorships
• Program Income

There is no one-size-fits-all approach to expenses. Expenses should include the categories and line items that make sense for your organization. Some common categories are: 

• Personnel Expenses like salaries and benefits. 
• Functional Expenses like marketing, website, IT support, and strategic consultants. 
• Administrative Expenses like travel, training, payroll, and depreciation. 

Grant or Project Specific Budgets 

Another budgeting need many nonprofits encounter is program or even project-specific budgets requested by grant funders. Having a solid operating budget can make this step much easier. Once approved, use your budget as a guide for putting together program budgets for grants. 

Balancing the Budget

There is a common misconception that your nonprofit budget should balance perfectly. It doesn’t have to. Since your budget is a tool to predict the future, it does not have to balance in the same way your books do. In fact, a small reasonable surplus should be the outcome of a good budget. One should have built in contingencies that are not used up and thus result in some funds left over. 

Resources and More

This blog post was written with the assistance of the following materials:

• Nonprofit Financial Commons: Should You Balance Your Budget? No! 
• Propel Nonprofits: Budgeting: A 10 Step Checklist 
• Ramp: Guide to Nonprofit Expenses: Categories and Tracking Tips 

This article is for general informational purposes only and does not constitute professional accounting, tax, or legal advice. Tax laws, regulations, and accounting standards change frequently, and the application of rules can vary based on your organization’s specific facts and circumstances. Before acting on anything you read here, consult a qualified professional who can advise you based on your situation.