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How to Put the Art Into the Science of Budgeting


By: Steve Zimmerman

Like most processes involving accounting, people enter the nonprofit budgeting process with a mix of fear and exhaustion at the thought of wading deep into a pool of numbers.  We’re prepared with spreadsheets that show the compensation of employees as well as other direct costs necessary for each program and fundraising activity to accomplish its goal.  We then put together our revenue guesses, oops, I mean projections, and hope for the best when we add up the two components.

Indeed, many of us are familiar with the mechanics or science of budgeting (which we address later) but, like most things in life, it is the art or finesse with which we carry out the process that allows budgeting to be far more impactful for an organization.

The nonprofit budgeting process can be especially useful for:

  • small organizations with lots of tasks and little money and
  • learning organizations that may utilize an adaptive approach to strategy, in which they engage in continuous strategic decision making and refinement.

For any organization, though, the budget provides an opportunity to pause, be reflective on where you’ve been, articulate what’s worked and what hasn’t and collectively decide where you’re going – almost like a mindfulness break in the middle of a busy day. After all, the cliché goes “a budget is nothing more than a financial translation of your strategic plan.”

The Art – An Inclusive Process

For a budget to (1) reflect the best thinking of an organization, (2) be accurate, and (3) be effective and uniting, the nonprofit budgeting process must be inclusive.  Unfortunately, for many organizations, financial planning and management activities tend to divide rather than unite.  Program staff and fiscal staff speak different languages and have different priorities. Program planning decisions can be viewed as failing to reflect economic realities, while fiscal management decisions are often viewed as insensitive to the programmatic mission of the organization.  At no other time is this conflict more apparent than during the budgeting process – the very process that could unite these viewpoints.

It is the leader’s responsibility to make sure various perspectives are heard and considered with the collective goal of developing a realistic and inspiring plan for the coming year.  Everyone committed to an organization has a role to play in that process:

  • Board: In partnership with senior leadership, the board provides the big picture direction and oversight for the nonprofit budgeting process. Board members may have insights about how funder or constituent needs have changed and how programs might adapt to meet those changes. They are also responsible for approving the final budget.
  • Program managers: This is a great time to build financial literacy within an organization.  Program managers, together with the finance staff, should plan the costs needed to accomplish their program objectives.  It is also a great opportunity to better understand their program’s strengths and look for new ways to generate revenue.
  • Development staff: Putting numbers to revenue lines should be the easy part of budgeting for the development team.  The bigger question is how will they engage current and potential donors and cultivate their passion and commitment to the organization’s mission?  The answers should be reflected in the expense budget for development.
  • Finance manager: The tendency in too many organizations is for the finance manager to do the budget.  Rather, the finance manager is the key facilitator of the process.  They serve as the budget manager – collecting input and, hopefully, building consensus throughout.

By leveraging multiple perspectives, the budgeting process becomes an opportunity for everyone to contribute to the organization’s work plan.  For many organizations, the annual budgeting cycle also offers the best (if not only) time to set meaningful financial goals.

The Science – Steps to Develop a Budget

With a shared inclusion mindset in place, the nonprofit budgeting process is relatively straightforward.  While the exact steps may vary, many lists contain essentially the same process:

  • Define the planning context and goals;
  • Estimate costs;
  • Forecast income;
  • Strike the balance between goals and resources; and
  • Approve the plan.

Define the Planning Context and Goals

Budgeting for the upcoming year should not be seen as “starting over” with a blank slate.  In fact, a lot of strategic thinking and reflection should happen before you begin the process of identifying specific income and expenses targets.  The budget should respond specifically to the organization’s current operating context. To make sure everyone understands this context, organizations need to assess their internal and external environments.

  • Internally this may involve understanding the organization’s current financial health.  How is the reserve?  Are revenue streams increasing or decreasing?  Are constituents happy with the services they receive?  Is the organization reaching its intended impact?
  • Externally, it may involve a market analysis of opportunities and challenges. You might find opportunity for expansion of a program into a new area or the loss of a major funding source.  While this need not be an extensive process, it is an essential grounding exercise prior to jumping into numbers.

Estimate Costs

Expenses reflect the work the organization wants to accomplish.  A nonprofit budgeting process motivated by quality programming and mission impact requires that the first round of expense forecasting be completed independently from the first round of income forecasting.

In this stage you will be estimating expenses for each specific activity.  We recommend calculating the full costs of each program, including expenses like rent and technology. It is helpful to consider administration and fundraising as activities just like program activities.

For most nonprofits, close to 80% of the budget is personnel costs. So, the best place to start with estimating costs is by determining how many people are needed accomplish your goals.  If you need to hire people, don’t forget the hidden costs of hiring, training and supporting new staff as well as additional benefits, office equipment and so forth.

Forecast Income

As with expenses, historical information, the experiences of others, and current considerations will form the basis for income estimates.  Fees, contributions, and special events can often be accurately estimated by reviewing previous data and adjusting for current plans and economic climate.  For small or new organizations making an educated guess may be the best forecasting method.

Strike the Balance

Once the team creates initial estimates for expenses and income, the organization can calculate a projected surplus or deficit.  Remember, the budget does not have to balance to zero.  An organization may choose to incur a deficit during a budget period.  In so doing, it would be deciding to invest resources accumulated in prior years.  On the other hand, the organization may wish to budget for a surplus to build operating reserves.

An organization that finds itself with a financially unfeasible first draft may consider increasing its fundraising goals.  But, when reviewing the income budget, avoid the temptation of raising income estimates without changing the specific plans for generating the additional income.  It is not enough just to say, “We’ll try harder to raise money this year.”

If expenses need to be reduced, determine what each program activity would cost at different levels of intensity.  There may be some programs where a large reduction in expenses will result in a smaller reduction in services than in other programs. The matrix map tool can help with such decisions.

Approve the Plan

While staff is responsible for developing the budget, the board reviews and approves the budget.  The best budget presentations clearly link the organization’s goals to the financial forecasts.  This is the time to tie the final budget back to the strategy that was used in step one.

The entire nonprofit budgeting process can take anywhere between one and four months depending on the size of your organization.  Make sure that you leave enough time to accomplish a thoughtful budget.  By being thoughtful during the budget process, balancing art and science, you can build an inclusive, leaderful culture that will allow your organization to sustainably accomplish its mission long into the future.