Wisconsin Historical Society

Guide or Instruction

How to Create a Budget for Your Nonprofit Organization

Create a Budget for Your Nonprofit Organization | Historic Preservatio | Wisconsin Historical Society

Even if your nonprofit organization is staffed entirely by volunteers, your group will need to create a budget to accomplish its goals. Your budget should be the basis for these three activities:

  • Raising money
  • Reporting to your board of directors
  • Communicating your work to the outside world

Use Your Budget as a Planning Tool

Your budget development process should serve as a planning tool for your organization. The process of creating a budget can help you think clearly about what you hope to accomplish and where you will find the funds to achieve these goals. This process can also help you think through how your group will pay for unplanned expenses, like fixing or replacing a malfunctioning computer.

Choose a Budget Leader

Your first step is to decide who will take the lead in developing your budget. If your group has a single staff person, that person might be the best one to develop a draft budget. If your group has no professional staff, then your board should decide who has the skills and willingness to take on the role. A single officer, such as the president/chair or treasurer, might be able to handle it alone. If your budget is complicated, then you may need to form a budget committee to develop a draft budget. Your full board and/or membership will need to review and approve your final budget.

Create a Budget that Matches Your Operational Structure

Your organization's budget should reflect the structure of your operations and complement your strategic plan. For example, if your organization doesn't have any paid staff members, you might want to make that a goal in your strategic plan — and add it to your budget. Here are some other tips that can help you create a realistic budget that matches your organizational operations:

Organize income and expenses into line items. Whatever your budget's size, organize income and expenses into budget line items that match your work activities. A line item is any fiscal entry that appears on a separate line in a bookkeeping ledger or a fiscal budget. Typical line items include salaries, rent, utilities, promotional items, printing costs, and project costs. If you hold a regular fundraising activity that supports your operations, include the activity as both expense and income line items. If your organization is supported by a grant, create line items that correspond to your grant categories. By organizing your expenses and income well, you will have an easier time creating regular reports for your board and potential donors.

Account for all staff costs. If you have staff, create a line item for employee benefits and taxes, including payroll tax. Social Security, Medicare, and unemployment insurance are all necessary overhead expenses. Other common employee expenses are pensions, medical insurance, and disability insurance. Pool the expenses for all employees into one line item. A detailed analysis of these expenses is only necessary if your group is considering hiring additional staff or if you are planning to take advantage of a salary savings when a staff member resigns.

If you have full-time employees who qualify for health insurance and part-time employees who don't, detail these items in the budget but do not assign rates to individuals. This approach will come in handy when you are applying for grants. Review the IRS guidelines for determining whether a worker is an employee or a contractor based on the individual's degree of independence.

Include D and O liability insurance. Consider purchasing Directors and Officers (D and O) liability insurance for your organization and board of directors, and include it in your budget. This insurance covers board members who suffer injuries or property damage, or who are subject to lawsuits for sexual harassment and discrimination, mismanagement of funds, or wrongful termination. Many grant funders will require that your organization have D and O insurance. In addition, some professionals may not join your board if you do not have this type of insurance.

Include the little things. Your budget should also include indirect program costs such as accounting, auditing, property and liability insurance, and portions of staff time required to administer projects. This is especially important when using grant funds. Grant-funded activities can easily eat into your general overhead budget.

Be conservative and realistic. If you are trying out a new funding stream, be conservative with your income estimate. If you are unsure about a regular source of annual income, do not guess. Ask questions and plan conservatively. It is better to add increments to your budget projections than to face a mid-year shortfall.

Create a cushion. Create a little cushion in your budget for unexpected expenses and shortfalls. A cushion is especially important for new organizations that lack predictable income streams. This cushion can be included within your "miscellaneous" line item. However, note that you should minimize your use of the miscellaneous line item in grant budgets.

Practice Accountability Measures

Whenever you are developing or revising your budget, practice the following measures to ensure your organization's accountability with money matters:

Be inclusive. Keep lines of communication about money matters open. Your staff and most active volunteers should feel ownership of the budget. At meetings, recognize and encourage cost-cutting ideas and efficiencies, especially during a budget crisis. When staff feel powerless to protect their jobs, they are much more likely to disconnect. Involvement increases accountability and engagement. Staff may also have ideas that neither your executive director nor your board members have considered.

Be transparent. Include your full budget in your annual report. By letting your membership (and potential donors) know how your organization is spending its money, you will demonstrate your organization's commitment to operating with transparency.

Record your process. When you are developing your draft budget, use a spreadsheet program such as Excel that includes a notes function. Use this function to keep track of your assumptions about line-item changes and estimates. Review your budget throughout the year and revisit your assumptions. This practice will help you budget more accurately in future years.

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