Nonprofits are organizations that are run solely for the benefit of the community. Being a non-business entity, they have no actual way to generate income. They rely on the goodwill of benefactors, grants, and fundraising campaigns to function. The uncertainty factor means that nonprofits have to carefully evaluate their monetary situation every year. Luckily, fundraising sites can help them keep track of their finances.
However, we believe that there is an even more important aspect than simply keeping track of finances. That aspect is budgeting. It is an extremely important aspect of running a business and nonprofits need to budget carefully. Times such as these are especially important, where there is uncertainty around the economy.
Nonprofits are often thrown into panic mode due to the widespread fear around the pandemic. The first step is to only listen to reliable news sources. Once you are aware of the exact piece of information, it is time to budget. If your organization has not yet created a budget, you definitely should. Another important point of note is that even if you have created a budget, it might be time to revisit it.
What is the nonprofit’s budget?
A budget allows you to allocate the resources, plan and track your finances for a fiscal year. There are various types of budgets an organization can make. It could be for an event, the year, or even for a capital campaign. While budgets might seem disconnected, it all adds up when you compare the income and the expense. Every nonprofit needs to have a robust accounting team to ensure that the budget is refined and they can make realistic estimates over time.
Budgeting is often seen as a way to curtail expenses, however, it is much more than that. Budgeting is designed to cut down on unnecessary spending. You need to make sure that instead of relying on the budget, the items in your budget are realistic.
Things to look for, while making a budget
So, it has been established that a budget needs to be concise and it can help nonprofits manage resources better. What are some things you need when you are making a budget? The comprehensive list below contains everything.
Realistic budgets and decisions are crucial for nonprofits. Budgeting will force your nonprofit to evaluate past expenditures and make decisions that are in line with the spending. The key to creating an effective and realistic budget is through bookkeeping.
Bookkeeping gets a bad rep and is often categorized with accounting, however, they are two different things. Bookkeeping is when you keep a track of financial records, accounting is inferring the data from bookkeeping and making informed decisions based on the data.
A good practice that every nonprofit should follow is to maintain up-to-date accounts. Anytime you forget to add an expense or if your record is outdated, you are only slowing down the process. You can use the following methods to maintain effective bookkeeping.
- Organize your ledger: It should contain a chronological flow of receipts and expenses. It should also be understandable by anyone.
- Record transactions promptly: Any transaction that you make should be recorded as soon as possible. This helps you keep a track of it, while not having to revisit it.
- Allocate costs: Once you are sure of all the outgoing expenses, it is time to allocate costs. Doing this immediately will help you save time and avoid overspending.
Evaluate the viability of income sources
A crucial part of budgeting is to see whether the income stream is stable. Nonprofits have multiple streams of income. These can be fundraising, grants, and corporate philanthropy. The revenue you get from these sources determines your budget. To get a good idea of the viability of your income source, nonprofits need to evaluate past success. This typically means they need to look at past fundraisers. The past is always indicative of what the future holds.
While we live in a rather uncertain time, nonprofits still need to assess their track record. A good barometer would be the financial crisis of 2008 when every nonprofit faced its worst year in terms of fundraisers. Finding funds during this time is crucial and there are some ways you can do that.
- Write grants to organizations and donors that are indulging in philanthropy.
- Appeal to your biggest donors. First, ask them about their situation during these stressful times and then explain the situation for your nonprofit.
- Keep marching on! No matter the setback and the difficulties we may face, it is important to keep your mission in mind and continue with the fundraisers.
Consider the fixed and variable expenses
There are two kinds of expenses every organization incurs from time to time, fixed and variable. Fixed expenses include salaries, bills, rent, and software investment. These fixed costs make up the majority of a nonprofit’s operational expenses. These costs are predictable and hence do not need much room for variance in your budget.
Variable expenses are those that can fluctuate over time. These are costs that typically vary from year to year and cannot be precisely accounted for. Expenses such as marketing costs, fundraising, and event expenses fall under the variable category. While you cannot get a precise number, you can still analyze past data to get an approximation of variable expense.
Review the budgets from previous years
The biggest change you will make when you start budgeting is that your finances will become better. However, this is not something that can happen overnight. Often, first-timers will end up over or under budgeting. This is bound to happen as estimation and calculation come with some margin of error. As time goes on you will be able to budget better and the figures will become predictable over time.
For those of you making new budgets, it is advisable to take a look at the budget from previous years to get a good idea of what your budget should look like.
While budgeting by itself is a challenge, the difficulty of the task is compounded as we are facing the looming uncertainty of the pandemic. The burden can be lessened by understanding the elements of a budget, using the right tools, and by consulting with the right personnel.
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