Lesson 1 – What is a budget?

Your budget represents what your nonprofit expects to spend (expenses) and earn (revenue) over a specified period of time. Budgets are useful for projecting how much money you will need for operating your organization including costs for administration, fund raising and your mission based programs. Your budget also helps measure whether or not your actual revenue and expenses are in-line with your budget. There are different types of budgets, including: yearly (annual or operating) budgets, cash budgets, capital budgets (for major assets, such as equipment, buildings, etc.) and proposal budgets (for grant applications).

Basically, your budget is a financial plan. It quantifies your annual strategy and is used to communicate your finances with your organization’s board, staff and funding sources. As a nonprofit, it is important to break your budget down by each of the programs, or functional areas that define your activities.

A budget must be developed first for your administrative expenses, which is essentially what is needed to oversee the operations of your organization. Next, a budget is created for your fund raising efforts, which determines how much you need to spend to raise the funds to operate your organization. Finally, budgets are created for each of your mission based programs to determine the expenses needed to effectively run those programs. Segregating your budget by these areas will provide management with the information that will properly measure your organization’s financial and operational goals.

In simple terms, your budget is a financial plan for the year. It quantifies your annual strategy and is used to communicate with your organization’s board, staff and funding sources. Budgets matter because they provide the financial information to support all planning. Effective budgets are realistic, using sound assumptions and clear accountability to achieve those assumptions.

Budgets are management tools to measure progress toward goals:

  • Review monthly revenue and expenses.
  • Create accountability by department and the organization as a whole.
  • Separate program budgets from special budgets for capital projects or fundraising events.
  • Budget must be created from the bottom up to reflect each program’s individual fiscal requirements.