Among the many nonprofit best practices discussed in trade magazines and industry circles, budgeting is often relegated to the back pages or as an afterthought. Sound budgeting is the fuel that runs the nonprofit engine, ensuring that every program has enough support to run for the year and that funds are allocated fairly throughout the organization. It’s an important aspect of the annual accounting cycle and an activity that touches on every department within a nonprofit organization.
How your nonprofit derives its annual budget and how frequently it checks and updates it is a good gauge of its financial health. A healthy organization tackles the budgeting process early in the cycle, leaving adequate time for zero-based or increase-based budgeting. It also sets aside regular periods to examine and adjust existing budgets. Let’s take a look at nonprofit best practices in the area of budgeting and how you can apply these best practices to your organization.
Nonprofit Best Practices: Budgets as Guides
Budgets are guides that help your organization plan for the future and determine its present course of action. They should be thought of as guidelines for spending and saving rather than rigid, fixed numbers to reach.
Budgets are also external-facing documents for many nonprofits. Department leaders and staff refer to them to establish programs and monitor costs, but they may also be shared with the Board of Directors, donors, and members to establish how funds are being spent and to develop a sense of transparency about activities, expenditures, and how donations are used.
Cash or Accrual Method? It Depends
Another aspect of nonprofit best practices is deciding which accounting method a nonprofit will follow: cash or accrual basis. Cash basis records transactions as cash is received or spent. The accrual basis means recording revenues when they are earned and expenses when they are accrued. Either method is fine, if kept consistently. Smaller nonprofits often choose cash-based accounting methods and budgeting, while nonprofits receiving multi-year funding may find accrual methods work best.
A Checklist of Nonprofit Budgeting Best Practices
As you begin your annual budget cycle, the following checklist of nonprofit best practices for budgeting may be helpful.
- Set and follow a timeline: To complete your annual budget in a timely manner, it’s important to create a reasonable timeline with deadlines, milestones, and checkpoints for your staff. Make sure you allow adequate time for budget reviews and feedback.
- Agree on goals: Plans for each department, which include stated goals and how they relate to the nonprofit mission, should be included in the budgets. Gain agreement on which programs and activities will proceed before you start the budgeting process.
- Review current year budgets and actuals: Check your current budget and actual against the budget. This will help you set the new budget.
- Assign roles and responsibilities: Each group should determine who will build the budget, who will review, and how the money will be allocated. The accounting department should also establish procedures for budget review and approval.
- Draft income and expense budgets: Build out your drafts and share them for feedback.
- Review process and approval: Leave plenty of time to share the drafts with the appropriate organizational leaders for review and approval.
- Document approved budgets: Document the approved final budgets. Implement the final versions and assign people to monitor them.
Rich Set of Resources Available – Free
The National Council of Nonprofits has created an extensive list of articles, white papers, checklists, and a downloadable guide to assist with nonprofit budgeting. It’s an excellent collection of nonprofit best practices as they pertain to budgeting and accounting. You can find the complete list on the National Council of Nonprofits website.
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