How to Create a Budget for a Nonprofit (Tools + Template)

Every other nonprofit organization often struggles with unpredictable funding, multiple program needs, and the pressure from stakeholders to maintain financial transparency. 

Effective budgeting sets the foundation for raising enough funds, funding, and managing multiple programs, and demonstrating accountability and transparency. 

In this guide, we explore the tools and practical steps you can use to create a sustainable and mission-aligned nonprofit budget.

Speaking of tools, Martus helps you create a comprehensive organization-wide budget through intuitive and collaborative worksheets. You can even integrate each department's budget seamlessly into the overall budget. 

Martus lets you pull real-time data from your accounting software and build new budgets in minutes from scratch. You can also base them on historical data or the previous year's budget, ensuring they are grounded in reality and aligned with your overall financial strategy. 

Streamline your budgeting processes with Martus. 

Why Budgeting Is Crucial for Nonprofits

Nonprofit budgeting is much more than a financial exercise. It's a handy tool for mission planning, ensuring every dollar you spend supports your mission and goals. 

A good budget allows you to:

• Align Spending with Goals: Your budget is the roadmap that guides you on how to prioritize resources to ensure you direct your funds where they'll have the most impact based on your goals. 

• Prepare for Funding Shifts: You may experience a delayed grant or a drop in donations. A budget helps you anticipate and adapt to changes in funding without compromising your core programs and services. 

• Build Credibility with Funders and the Board: A clear and realistic budget shows you are financially accountable and transparent, which builds your credibility with your board, donors, and grantors. Your funders will be more willing to continue supporting your mission.

• Maintain Compliance and Streamline Reporting: A strong budget helps you comply with legal and donor or grantor requirements, such as using certain funds for a specific purpose only. Grant reporting becomes smoother and more accurate. When you apply nonprofit accounting best practices such as fund accounting, it's easy to track and report on how you spend restricted and unrestricted grants. 

Key Components of a Nonprofit Budget

A practical nonprofit budget includes the key components below to help you plan effectively and align your financial goals with your mission.

• Revenue Sources: Your nonprofit wouldn't be without revenue. Each budget should include all the income or revenue you expect, such as grants, donations, and earned income. For example, you could be expecting a $55,000 grant for a youth program, individual and corporate donations from a year-end campaign, and earned income from training fees. 

• Program Expenses: These are all the costs directly tied to your mission work. For instance, you may buy supplies for a tutoring program, pay staff salaries for the educators, and pay for the educators' transport.

• Administrative/Operating Costs: Your budget should include all the day-to-day expenses for running your organization. These may include rent, office equipment and supplies, software subscriptions, and salaries for administrative staff. 

• Fundraising Costs: Most nonprofit revenue comes from proactive fundraising. Your budget must include all the expenses you expect to incur to help you raise money and other resources. These can include event costs, donor management software, and marketing collateral for campaigns. 

• Reserve Funds: You'll want to set aside some savings for the proverbial rainy day or future organizational growth. Budget for a three-month reserve fund, at the very least, to cover your organization's expenses during a significant shift in revenue and costs. 

To promote clarity and accountability, tag each expense by type, function, fund, or donor/grantor restriction. Tagging helps you comply with funder requirements and improve the accuracy of financial reporting.

How to Create a Budget for a Nonprofit

Creating a nonprofit budget is a strategic process that helps align your resources with your mission. 

Let's see how you can build a strong and realistic budget using the following steps. 

1. Gather Historical Data: Start by reviewing your past budgets and actuals to get a sound foundation for your projections. Consider the revenues, expenses, and trends of the previous years. 
2. Forecast Revenue by Source: Estimate the revenue you expect from each revenue stream. Consider donations, grants, sponsorships, earned income, and more. You'll want to be conservative and realistic to avoid disappointments from overestimation. 
3. Estimate Expenses by Category: Break down all your projected costs into program, administrative, and fundraising expense categories. 
4. Align with Strategic Priorities: Match resource allocation with your key goals and the overall mission. Give more priority to initiatives or programs that will have the most significant positive impact. 
5. Review with Stakeholders: Share your draft budget with finance staff, program managers, and top leaders for feedback. A collaborative budgeting approach with the program leads and finance team improves accuracy, transparency, accountability, and buy-in.
6. Get Board Approval: Once you finish making the budget, present it to your board for review and approval. The board's oversight adds accountability and ensures your budget aligns with your mission.

Pro Tip: Ensure you reforecast regularly during the year based on actual revenue and expenses. Monthly reforecasting helps keep your financial management responsive and mission-focused. 

Budgeting Software for Nonprofits

The right nonprofit budgeting software can make a big difference in how you plan and manage resources. Choose a tool that can support mission-based work with the tailored features below.

• Grant and Program Tracking: Ensure the software can track budgets by grant or program to improve reporting accuracy and make it easier to comply with funder restrictions.

• Role-Based Access: Your preferred tool should allow for custom user permissions. Your staff and board members should access only what they need to maintain collaboration and the security of your data. 

• Real-Time Collaboration: Look for a platform that allows multiple users to view and edit a budget simultaneously, making it easier to involve the finance team, program leads, and executive leaders in the process.

• Integration with Accounting Tools: Choose software that integrates seamlessly with your nonprofit accounting tool to help reduce errors and manual data entry.

As a dedicated, cloud-based budgeting software for nonprofit organizations, Martus checks all the above boxes. 

Martus empowers you to take control of your budgeting through real-time collaboration, scalability, and seamless data integration. 

You also track your budget based on grants and programs, secure approved budget worksheets with end-user lock controls, and even create real-time budget vs. actuals reports. 

Transform how you create and manage your budgets with Martus now. 

Nonprofit Budget Template

You can use a nonprofit budget template to make budgeting easier and more actionable. 

A good template will help you organize your finances clearly and consistently, and can be customized to match your organization's size and complexity. 

If you make your own template, ensure it includes the following:

• Expected revenues from different sources.
• Expenses categories by function to ensure you comply with IRS Form 990 and acceptable funder reporting standards. 
• Columns for projected revenues and expenses, budgeted amounts, actual amounts, variances, and notes (for capturing context or restrictions). 
• Tags for fund restrictions to reflect restricted vs. unrestricted funding. 

The template you choose or make should be flexible enough for your specific needs. As a small organization, you can use a simple spreadsheet template that covers basic revenue and expenses.

If your organization is large and complex, you'll need a more robust template with tabs for multiple programs, funds, or fiscal years.

Common Mistakes to Avoid in Nonprofit Budgeting

Even with experienced finance and program teams, your organization might make costly mistakes that result in an inaccurate and rigid budget. 

You'll want to avoid common mistakes such as:

• Underestimating Costs: You might underestimate different expenses or leave out indirect costs like inflation, volunteer coordination expenses, or software renewals. Ensure you review historical spending data to catch overlooked items. You should also build a contingency fund as a buffer for unexpected costs. 

• Overestimating Income: If you are over-optimistic about grants or donations and other revenues you haven't secured yet, you might struggle with serious cash flow problems. To prevent this, forecast conservatively and build your core budget around confirmed or highly likely revenue. Label any unconfirmed income as "tentative." 

• Not Involving Program Staff: When you exclude your program staff from the budget creation process, you miss the real needs of programs on the ground. You must involve program managers early to onboard their knowledge of what's needed to make an impact. They can also flag timing issues or unrealistic projections. 

• Treating the Budget as Fixed: Most organizations treat their budget as fixed once it's approved, which can cause a drift from the mission when funding or needs shift. Treat the budget as a living document that you can update or adjust regularly. Set a monthly or quarterly reforecasting schedule to adjust your budget based on actual financial results and evolving priorities. 

Best Practices for Effective Nonprofit Budgeting

A budget that supports your mission goes beyond just balancing numbers. Use the best practices below to build a flexible, strategic, and impact-driven budget.

• Align the Budget with Your Mission and Strategy: Ensure each line item supports your core financial goals and mission. Even as you borrow notes from past budgets, you should start with your current strategic priorities and allocate resources accordingly. Review your mission and strategic plan before finalizing the budget to ensure they align. 
• Review Budget Performance Quarterly or Monthly: You can catch problems early within the fiscal year if you regularly review how your budget performs. Schedule monthly or quarterly budget vs. actuals reviews to help you spot trends, address overspending or underspending, and reallocate funds based on changing needs. Use nonprofit budget software with variance tracking, such as Martus, to conduct budget analysis. 
• Build a Contingency Fund: Add a reserve or contingency line in your budget to protect your organization from unexpected costs or delays in funding. You can set aside 3-6 months of operating expenses. 
• Using Scenario Planning for "What If" Situations: Scenario planning will help you think ahead and remain proactive. Develop best-case, conservative, and worst-case budget scenarios based on various "what if" conditions to guide decision-making. What would happen if a major grant delays or donations fall short?

Frequently Asked Questions (FAQs)

We'll end today's guide with answers to common questions about creating budgets for nonprofit organizations. 

How Do You Handle Budget Cuts in a Nonprofit?

When you experience a budget cut in your organization, you must 

• Understand the implications of the decreased funding.
• Explore alternative revenue sources and ramp up fundraising.
• Prioritize the most essential expenses.
• Engage effectively with funders to seek more support or have them unrestrict funds.
• Cut back expenses and reallocate the funds. 
• Revise your budget with new forecasts.

Martus allows you to reforecast and update or adjust your budget throughout the year to ensure your projections remain accurate and aligned with organizational changes. 

Can a Nonprofit Have a Surplus in Its Budget?

Nonprofits often have a surplus in their budgets, which they reinvest in programs and activities that support the mission of the organization. 

Depending on the source of the surplus, the excess funds can also be dedicated to paying debts, incentivizing staff members, or building a reserve. 

How Can Small Nonprofits Create Budgets with Limited Data?

As a small nonprofit with limited data, you can create budgets by starting simple and building from what you know already. 

You can make estimates based on past financial activity, such as bank statements or even informal records, and benchmarking from similar organisations. 

Conclusion

Through effective budgeting, your nonprofit organization can plan more confidently, use resources wisely, and deliver on its mission with significant impact. 

Learning how to create a nonprofit budget is part of a larger financial management process that ensures accountability, transparency, and continued support from donors and grantors. 

You can use modern budget software for nonprofits to improve your budget creation and management process. For example, Martus makes budgeting more collaborative, accurate, and adaptable. 

Martus allows your finance and program teams to work together to create a realistic budget and even reforecast in real-time to adapt it to changes that affect revenue or expenses. 

Try Martus today to empower your teams with transformative budgeting solutions.