Budget Projection Explained: Methods, Benefits, and Challenges

Most nonprofit organizations typically stop at simple budgeting and forecasting, which deprives them of valuable insights into their future financial outlook, including income and expenses. 

If your organization uses spreadsheets and manual processes, you are limited to basic budgeting and forecasting. 

Instead, you can use modern nonprofit financial management tools to augment other budgeting processes with comprehensive projections. 

Today's guide examines various budget projection methods that enhance transparency, collaboration, and informed strategic decision-making. We'll also discuss the best tool for all your nonprofit budgeting needs. 

What Is a Budget Projection?

A budget projection is a forward-looking financial tool that helps nonprofit organizations plan how they will use their resources in the future by modeling various potential outcomes. 

While routine budgeting focuses on tracking current costs under various expense categories and staying within limits, budget projections look further ahead. 

Your budget projection can look ahead in terms of months or years to estimate future income and costs based on shifting needs, objectives, and financing scenarios. 

As a mission-driven organization, budget projections are important for responsible stewardship of funds, financial transparency, accountability to funders, and maximizing your organization's impact. 

Projection vs. Forecast vs. Budget

While they are related, budget, forecast, and projection play unique roles in your overall nonprofit financial management strategy. 

Here's how they differ:

Budget

A budget is a spending plan that an organization usually creates at the beginning of its fiscal year based on expected income. 

For example, you might budget to spend $10,000 on a youth program, assuming a certain level of grant funding or donations will be available. 

Forecast

A budget forecast is an updated spending estimate that considers your prevailing financial reality and adjusts your expectations to reflect that reality. 

If you have six months remaining to the end of your fiscal year and you've only received three-quarters of the expected funds, a forecast can help revise your budget and guide real-time decisions. 

For instance, you can delay a project or relocate funds.

Projection

A budget projection models different potential outcomes with “what-if” scenario analyses. 

Let's say you are planning to launch a new community feeding program, but aren't sure how much funding you'll receive from grants. You can use projection to model several outcomes. What if we get full, partial, or no funding at all?

Why should your organization use all three?

When combined, budgets, forecasts, and projections help nonprofit leaders make more informed, flexible, and collaborative financial decisions. 

Your budget provides the plan, forecasts keep the plan grounded in reality, and projections test different strategies for uncertainty or growth. 

The combination helps your financial and non-financial teams to steward resources better, align your spending with the overall mission, and build trust with funders. 

Benefits of Budget Projection

When you project your budgets, you are able to move beyond reactive financial management since you now have a clear, forward-looking view of where your organization is headed. 

Projections save time, minimize errors, and promote faster, mission-aligned decisions. Here's how:

• Saves Time and Reduces Errors: Automated projection platforms eliminate manual data entry and reduce spreadsheet mistakes, saving time and minimizing costly errors. 
• Anticipates Funding Gaps Early: You can identify shortfalls well in advance, allowing you to adjust spending, raise additional funds, or revise your goals. 
• Aligns Resources with Mission Goals: Budget projections ensure that every cent you spend supports your overall mission, not just immediate goals. 
• Promotes Proactive Decision-Making: You can look ahead with confidence rather than scramble to react when the unexpected happens. 
• Strengthens Funder Confidence: Proper projections show donors and grantors that you are planning ahead and stewarding resources appropriately. 

Types of Budget Projection

To enjoy these benefits, you can project your budgets in different ways to overcome the uncertainty that comes with fluctuating donations and unpredictable grant renewals. 

Let's check out the three main types to consider. 

1. Cash Flow Projections: You can use cash flow forecasting tools to track when money is expected to come in and go out. The process ensures that your organization can cover its operating costs from one month to the next. 
2. Revenue and Expense Projections: You can estimate future income and expenditure based on funding/spending trends, short- and long-term program plans, and funding pipelines. Projecting your revenues and expenses helps with strategic planning, ensuring you remain aligned with the mission. 
3. Scenario-Based Projections: Modeling “what-if” situations, such as receiving partial, full, or no donor funding, helps you plan for uncertainty and make informed decisions. 

You’ll want to combine these three types for a comprehensive view of your potential financial situations.

Key Components of Budget Projection

Each type of budget projection relies on several components or elements that ensure your financial outlook is accurate, transparent, and meaningful for all stakeholders. 

Your projection should include the components below.

• Assumptions: Ensure you clearly define the “what-ifs” behind your projections. These can include seasonal giving trends, expected grant renewals, and expected spending. 

• Historical Data: Use past financial trends to inform your projections. Consider your incomes and expenses during certain months, quarters, or fiscal years. 

• Revenue Sources: Remember to capture all your expected income streams and track both committed and potential revenues. Your sources may include donations, grants, membership fees, and earned income from investments. 

• Expenses: You'll want to account for all fixed and variable operating costs, including fundraising spending, program costs, and administrative expenses. 

• Personnel Costs: Since they are typically the biggest expense, you must model personnel costs accurately. Staff compensation and future hires must be modeled appropriately, especially for mission-critical programs. 

Capturing these elements doesn't have to be tricky.

You can use financial management tools with dashboards and custom reporting. Modern tools can visualize projections and keep all stakeholders aligned and confident in how you manage nonprofit finances. 

Budget Projection Methods and Techniques

Now that you understand what budget projection is and its key components, let's look at the various methods for building one.

1. Trend Analysis

Use past financial patterns to project future outcomes related to revenue and expenses. For example, if you have increasing donations in the second quarter, factor this into your year-end plans. 

2. Rolling Projections

A rolling system updates your projections continuously throughout the year on a weekly, monthly, quarterly, or semi-annual basis. The idea is to reflect real-time changes in expenses, funding, or mission priorities. 

3. Driver-Based Budgeting

You can build projections around key factors that affect your organization's income and expenses, such as volunteer hours and the number of events held. This approach shifts the focus from mere static numbers to projecting how your budget shifts when operations change.

4. Grant-Based Projection

This method projects revenue and costs around specific grant timelines, renewal likelihoods, and funding cycles. You can use it to plan for restricted vs. unrestricted grants and align expenditure with grant deliverables. 

5. Fundraising Scenario Modeling

Nonprofits can project income based on best-case, moderate, and worst-case fundraising outcomes. It will be easier to plan around funding variability, campaign objectives, and economic changes in the market.

6. Zero-Based Projection

The zero-based system begins each budget cycle from zero, rather than rolling over the previous year's statistics. With this method, you can justify all expenses and align spending more tightly with mission priorities. 

When applying these methods, you'll want to promote collaboration between financial and non-financial teams. 

Collaborative budgeting helps break down spreadsheet silos, ensuring every participant contributes to and understands the projections beyond their own area of operations. 

You'll also want to use modern software to leverage automation and real-time updates. 

The key is to find a tool that can automatically import live data, minimise manual data entry, and update your projections as conditions change. 

Budget Projection Software

Speaking of software, let's check out the best and the key features to consider. 

Spreadsheets are familiar, but they are vulnerable to control issues, siloed workflows, and costly errors. The best approach is to use a dedicated budget projection tool. 

As a financial management platform designed for nonprofit organizations, Martus delivers more than budget projections with key features that include:

• Seamless integrations with your nonprofit accounting software, such as Sage Intacct and QuickBooks, for automatic data importation.  

• Unlimited budgets and projections for multiple programs or departments.

• Advanced reporting and visual dashboards for clear, actionable insights. 

• Scenario planning tools for modeling uncertainty and supporting confident decision-making. 

Martus also offers advantages such as:

• Automation, which reduces manual data entry and reduces errors through real-time updates. 

• Collaboration, which allows multiple users like the executive, finance, and program leads to work together in one shared platform. 

• Alignment with reality by syncing with your accounting system to base your projections on actuals. 

Make it easier for your teams to stay financially informed, aligned, and focused on impact — get started with Martus today.

Common Challenges in Budget Projection

Many nonprofits struggle with budget projection, but you don't have to go through the same if you can avoid these common roadblocks:

• Outdated Data: Your projections can become irrelevant fast if you always base them on last month's numbers rather than actual current data. 

• Unreliable Spreadsheets: Using spreadsheets exposes you to version control problems, costly mistakes, time wastage, and poor scalability. 

• Lack of Collaboration: Most nonprofit finance teams work in isolation, keeping leaders and program staff out of the loop and sending them numbers they struggle to understand. 

As a forward-looking organization, you can break through these complications by using Martus to:

• Pull real-time financial data from your accounting system
• Automate workflows and updates
• Collaborate with financial and non-financial staff in one centralized platform.

Frequently Asked Questions (FAQs)

Let's wrap up with quick answers to common questions about budget projections. 

How Often Should Budget Projections Be Reviewed?

You can review your projections regularly on a monthly or quarterly basis to adapt to changes in funding, donations, or operating costs in real time. 

Martus makes frequent reviews easier and less time-consuming, using actuals from your accounting tool. 

How Accurate Are Budget Projections Typically?

Budget projections are typically accurate, provided you use up-to-date financial data and the right software. You don't have to worry about perfection. The focus should be on preparedness and strategic flexibility.

The right cloud-based projection tool offers automation, integrations, and collaborative inputs to improve accuracy compared to spreadsheets.

Can Small Businesses Benefit From Budget Projection?

Small businesses can leverage modern tools to scale projections when they outgrow spreadsheets, which ensures they streamline growth planning, hiring decisions, and cash flow visibility.

What Skills Are Needed for Effective Budget Projection?

Your teams don't require advanced finance expertise once you acquire the right tool. They should focus on clarity, collaboration, and mission alignment.

Some critical skills include collaboration and communication, scenario modeling, predictive forecasting, budget analysis, strategic thinking, and attention to detail. 

Martus is easy enough for both financial and non-financial users without the need for specialized skills. 

Conclusion

Effective budget projection shifts financial management from a reactive task to a strategic driver, allowing you to respond to changes proactively. But you have to find the right software. 

Martus makes it easy to apply various projection methods and gain insights that help you make strategic, mission-driven decisions based on possible future income and expenses outcomes. 

Martus’s cloud-based system ensures all your projections rely on real-time data drawn directly from your accounting system, which promotes accuracy and reliability. 

Check out Martus today to streamline your budgeting processes.