Nonprofit Budget Categories - Master the Essentials

Managing your nonprofit budgets can feel like juggling—with competing priorities, limited resources, inputs from multiple teams, and constant updates. If you are still using spreadsheets, you've likely experienced frustrations such as version control issues, collaboration headaches, and difficulty staying aligned with your mission.

In this guide, we'll look at how using clear nonprofit budget categories and the right tools can help you allocate resources effectively and maximize the impact of your mission. 

Ideally, you'll want to say goodbye to the frustration of using outdated budgeting tools and hello to control, confidence, and clarity in your budgeting process with modern solutions. 

That's where modern tools come in. Martus can help you achieve this goal through our transformative and intuitive cloud-based software, designed to streamline financial management for organizations. 

With our software, you can complete financial activities such as budgeting, forecasting, and reporting for enhanced decision-making, transparency, and efficiency. 

Schedule a free consultation today to discover our collaborative, flexible, and empowering nonprofit budgeting solution.

Why Nonprofit Budgeting Is Different (and More Complex)

Nonprofit budgeting is about a mission’s purpose and impact. Unlike a profit-driven organization focusing on profit margins, a nonprofit must ensure every expense aligns with the mission across multiple budget layers. 

You may have an overall operating budget, but you'll also need specific program budgets. These individual budgets can have many nuances, as you may have to fund them internally or rely on donations. Some may be tied to grants, which are often stricter. 

Besides each budget requiring detailed planning, reporting, and allocations, complexity may arise in other ways:

• Overhead costs such as rent and salaries may be shared across programs through indirect allocations. 
• You may need to allocate salaries across multiple programs, adjusting monthly based on the time spent on each program. 
• Revising budgets and reforecasting is unavoidable because of changes in funding or significant shifts in priorities. 

Why Budgeting Matters in the Nonprofit Sector

Budgeting is important for nonprofits because it contributes to an organization's sustainability and success in various ways:

• Aligning Financial Resources with the Mission: Creating a budget for a nonprofit ensures that every cent spent supports the mission and operational goals. It also clarifies how financial resources are allocated to activities or programs to prevent misappropriation and ensure that your organization focuses on its main work. 

• Demonstrating Financial Transparency and Accountability: Budgeting for nonprofit organizations helps demonstrate to the public, donors, and funders that you are fiscally responsible. A reasonable budget shows the source of funds, their allocation, and whether they are being used as planned. For example, proving that a higher percentage goes directly to programs rather than administrative overhead can increase donor trust and lead to higher donations. 

• Progress Tracking and Performance Evaluation: A well-structured budget acts as a framework for measuring progress towards your goals and mission. You can use it to evaluate the effectiveness of your programs. When you compare actual expenditure with the budget, you can see where you perform well and where to improve. Budget vs actual reports are factual evidence of financial performance. They can show you the positive and negative repercussions, helping you stay on track without guesswork or surprises. 

• Supporting Strategic Planning and Decision-Making: A good budget helps you make data-informed resource allocation and investment decisions. Budgeting acts as the basis for your strategic plan, allowing you to forecast needs and plan for long-term sustainability. 

• Improving Efficiency and Resource Management: Budgeting promotes the efficient use of resources by showing areas where you can adjust expenses to reach your goals, depending on your mission and priorities. It can reveal where spending more in certain areas is strategic. For example, investing more in community outreach when rolling out a new program can help improve participation and strengthen the impact. Budgeting also effectively manages cash flow, ensuring you have the financial resources to run smoothly. 

Key Nonprofit Budget Categories to Know

Nonprofit budget categories are organized financial areas that help your organization plan and track its funds. The areas make it easy to monitor financing, comply with reporting requirements, and promote transparency. 

There are two key categories for nonprofit budgets: revenue or income, and expenses. 

We'll focus more on the expense category in the next section, but we can highlight some of the types that make up the revenue category:

• Grants, such as government, family foundation, and corporate grants.
• Corporate philanthropy, such as volunteer grants, giving campaigns, matching gifts, and sponsorships. 
• Donations and contributions, such as individual donations and online giving campaigns.
• In-kind contributions, such as donated services or goods, like pro bono legal assistance and donated equipment. 
• Incomes from special events, such as ticket sales for fundraising events or auctions. 
• Earned income, including tuition fees, merchandise sales, membership fees, and fees for services you may have provided, such as counseling services.
• Unrealized/realized gain/loss from investments
• Fundraising incomes
• Miscellaneous income, such as revenue from investments, dividends, or interests. 

Note: You may categorize some revenue sources under a different subcategory because they bridge multiple areas. For example, you can categorize corporate grants as regular grants or corporate philanthropy. 

What to Include in Nonprofit Expense Categories

You can put the income from the above sources into nonprofit expense subcategories such as:

• Program costs, which are the largest expense for nonprofit organizations as they are directly related to ensuring programs or services reach the target beneficiaries. These can include program-related salaries, travel, supplies, and beneficiary events.

• Administrative costs, which are expenses related to managing the nonprofit, such as utilities, legal fees, insurance, accounting fees, office rent, technology and software, and non-program staff salaries. 

• Marketing and fundraising expenses, which include the costs of promoting the organization’s mission and raising funds, such as promotional materials, maintaining your website, or holding fundraising events. 

• Personnel expenses, which include employees’ salaries, wages, and payroll taxes.

• Travel expenses, which cover the costs of travel for volunteers or staff, such as transport, meals, and lodging. 

• Capital expenses, such as buying significant assets like equipment or buildings. 

• Miscellaneous expenses, which include unforeseen expenses or those that don't fit well into these subcategories. 

Note: Just as with revenues, some expense items can fit into multiple subcategories, depending on how you define them. For example, administrative costs such as legal and accounting fees can be placed on their own as professional services expenses. 

How to Make a Budget for a Nonprofit

Here are the steps to follow when creating a nonprofit budget:

1. Define Your Annual Goals: Identify and explain what your nonprofit seeks to accomplish in your fiscal year. For example, you could launch and run a literacy program for 1,000 students across different school districts. If you are a civic and social organization, you can help register 5,000 new voters in underrepresented communities and host 20 community forums to encourage public participation. 
2. Identify Your Activities and Programs: List all the events, activities, and programs you'll run. List what's required for each, such as staff, space, supplies, and more. 
3. Decide on an Approach: You can make a budget using either the expected expenses first approach or the expected income first approach. The budget should balance in both cases, meaning the expenses shouldn't exceed the income amount. If your operational decisions will be based on expenses first, use the expected expenses first model. 
4. List All the Expected Expenses: Identify and list all the potential expenses, including rent, program costs, utilities, and more. 
5. List All the Expected Incomes or Available Funds: Identify and list all the types, sources, and amounts of income you expect to get. If you plan to entirely or partially fund the budget using already available funds, list them down as well. 
6. Calculate the Budget: Use a spreadsheet or nonprofit budgeting and financial management software to determine the total expenses and revenue, ensuring they match. The income should cover or exceed the expenses. If it doesn't, raise more funds or reduce your expenses. 
7. Review the Budget with Your Team or Board: Go over the budget with the team or board to get feedback and official approval. 
8. Monitor and Adjust Periodically: Track your actual expenditure vis-a-vis the budget and update different aspects monthly, quarterly, semiannually, or over the length of the grant if your programs are grant-funded. 

When it comes to drafting the actual budget, you may realize that your organization has outgrown spreadsheets. They are time-consuming, prone to errors, outdated, unsuitable for collaboration, and hard to scale. 

Instead, you can have better results with a targeted modern solution. At Martus Solutions, we offer reliable cloud-based software designed to streamline budgeting and financial management for nonprofit organizations. 

Here's how our software can transform your nonprofit budgeting process:

• Promoting Collaboration: Different teams can work together on the budget simultaneously, which improves transparency and accuracy. 

• Ease of Use: Our tool is intuitive and easy to use, reducing the need for extensive nonprofit budget training for users. 

• Mission-Driven Focus: Our software is designed to help nonprofits align their financial strategy with their mission and operational goals. 

• Seamless Connectivity and Integrations: Our tool integrates with over 25 accounting and ERP systems to ensure smooth data flow.

• Scalability: You can easily adjust your budgets as they become more complex and nuanced. 

• Advanced Forecasting and Reporting: You can plan ahead and make decisions based on real-time data-driven insights. 

You can future-proof your budgets today. Get our budgeting guide and take control of your nonprofit’s financial strategy.

Tips for Budgeting for Nonprofits with Limited Resources

Now that you have the budgeting basics dialed down, how do you ensure your budget is effective now and in the long run?

Here are tips and best practices to follow:

• Be Clear on the Specific Type of Budget: Mostly, it will be the nonprofit operating budget, the master financial plan of your forecasted annual revenues and expenses. The nonprofit program budget is also common, predicting all the income and expenses for launching new programs.

• Rely on Historical Financial Data: Use past financial data to plan for recurring expenses, account for seasonal variations in revenues, identify revenue-expense imbalance risks, or analyze surpluses. 

• Embrace Flexibility: Plan for unwanted aspects such as economic downturns, emergencies, and severe revenue drops. Build a contingency fund, prioritize critical expenses, and use scenario planning to remain realistic and pivot quickly if necessary. 

• Review and Adjust the Budget as Needed: Review your budget monthly, quarterly, or annually to identify and correct mistakes. Monitor your budgeted expenses and revenues as well as your actual numbers to adjust as needed.

• Develop Internal Budget Templates: You can use free nonprofit budget templates or customize them to your needs. Better still, make your own templates since you are more likely to capture all the internal budget items to consider. However, templates may not be helpful across different projects. 

• Embrace Nonprofit Financial Management Technology: Shift from tedious and error-prone spreadsheet budgeting to streamlined, strategic, and collaborative nonprofit budgeting that aligns with your goals.

Frequently Asked Questions (FAQs) 

Let's end the discussion with some common questions about nonprofit budgeting. 

How Often Should You Update a Nonprofit Budget?

Like for-profit organizations, nonprofits should develop an operating budget yearly. The overall budget includes the organization budget and all the program budgets. These budgets are living documents that can be updated periodically throughout the year. 

Since a budget is a list of priorities that’s not set in stone, the "one and done" approach to budgeting has diminished, thanks to a rapidly evolving economy.

Depending on your needs and situation, you can review and update your nonprofit budgets monthly, quarterly, semiannually, or annually. 

For example, salary allocation is a moving target throughout the year, and many organizations want to reallocate monthly based on the number of hours actually spent on the programs. 

If you are running a grant-funded program, you can update the program periodically over the length of the grant. 

With Martus, nonprofits can review and adjust budgets anytime. 

What Is the Difference Between a Program and an Operating Budget?

An operating budget lists your organization's forecasted revenues and expenses for a given year, including program costs. 

Operating budgets usually include all the administrative and overhead costs, such as rent, IT, staff salaries, utilities, and more. 

For example, staff salaries are allocated to individual programs from the operating budget, and a single employee might be assigned to multiple programs. 

On the other hand, a program budget lists all the predicted revenues and expenses for launching new programs in a given year.

Program budgets typically include indirect allocation, a system where a portion of the budget is allocated to cover part of the overhead costs. The program manager usually has a lot of latitude in defining and managing their budget. 

If the program is funded by a grant, the grant terms usually specify how much of the budget can be allocated in this manner and which overhead costs can be covered. 

Grant-funded programs often run throughout the length of the grant, rather than the fiscal year, as is the case with an operating budget. 

At the same time, a program manager is typically mission-oriented and not a financial expert, which makes them better at handling project budgets. Operating budgets are better handled by financial experts. 

For more productive program planning, we recommend our Special Purpose Worksheets. These worksheets allow you to create budgets that fit specific objectives or situations, such as conference budgets, grant allocations, and team event budgets. 

Can You Use the Same Nonprofit Budget Template for Every Project?

If the consideration items are the same, you can use the same general nonprofit budget template for all programs. This is possible for recurring projects that remain the same year over year.

However, templates may not always work well across projects since different projects or programs can have different goals, needs, activities, and resources. 

Each project must always include every expense it incurs, including direct expenses (such as salaries, supplies, and other costs) and indirect overhead allocation. 

The good news is that you can have multiple budgets in Martus. You may have a baseline budget, a quarterly forecast, an approved budget, and more. 

Having multiple budgets allows your team to plan for any scenario. The dimensions may remain the same across budgets, but the numbers may differ based on various circumstances. 

Conclusion

Comprehensive nonprofit budgeting doesn't have to be a constant struggle. With the right budgeting software, it’s easier to achieve transparency, clarity, long-term sustainability, and strategic growth.

But if you stick to outdated methods like spreadsheets, you'll be overwhelmed by errors, poor scalability, tediousness, and poor collaboration. Instead of focusing on impact, you'll spend more time chasing numbers than advancing your mission.

Your organization deserves better. You can have better results by planning effectively for all your expense and revenue categories using a cloud-based financial management tool for nonprofits. 

Martus Solutions provides an easy-to-use cloud-based software built with nonprofits in mind. Our platform supports collaborative budgeting, financial forecasting, and real-time reporting to help you make smarter, mission-focused decisions.

Schedule a discovery call with us today to see how we can help you move from overwhelmed to empowered in your nonprofit budgeting process.