Budget Building Essentials Series

There are many layers to the annual budget building process, but staying focused on tried-and-true budget building practices will help ensure that the budget serves as a thoughtful benchmark for use and allocation of your nonprofit organization’s valuable yet limited financial resources.

This series explores essential budget building concepts and strategies to help nonprofit organizations better assess capacity, improve performance, and deliver on mission and promises, including the role of nonprofit budgets, budgeting for revenue and support, preparing a budget for salaries and labor costs, and using a functional approach to the expense budget.

Part 1 of 4: The Importance of Budgets to Nonprofit Organizations

The delivery and interpretation of financial reports is a complex and sometimes unpredictable process. It becomes even more complicated when you realize that the target audience consists of multiple end-users who will be considering financial information from multiple points of view. Effective financial messaging tactics that incorporate a three-dimensional (3-D) tactical approach will give you more options and opportunities to connect with the many different types of users of financial information.

Part 2 of 4: Budgeting for Nonprofit Organizations and Why It’s Important to Start with Revenue and Support

Assembling a budget for a nonprofit organization often feels like an endeavor that requires more artistic methods than scientific computations. This is especially true when it comes to budgeting for revenue and support, which is usually hard to predict with accuracy. To help balance the art (intuition) with the science (analysis) of budget building, consider using a “funding-first” approach.

Part 3 of 4: Budgeting for Salaries is Key to the Nonprofit Budget Building Process

When preparing a nonprofit organization expense budget, I generally favor using a programs and operations approach rather than an expense by line-item method. The one exception is budgeting for staff costs (salaries, employee benefits, and payroll taxes), which is usually the largest expense line-item in a nonprofit’s budget. Preparing a separate labor budget at the front end of the budget building process will enhance planning and improve management of the organization’s workforce.

Part 4 of 4: The Functional Approach to Budgeting for Expenses

Often, we refer to the size of a nonprofit organization by the total expenses within its annual operating budget. This emphasizes the important role of expenses in the budget while also serving as a measure of an organization’s capacity to provide programs and services. To get the best possible budget for expenses, nonprofits should use a functional (programmatic) approach that better displays the cost of programs, activities, and operations and encourages staff ownership and accountability.