Budget Blunders: How Your Nonprofit Can Avoid Common Mistakes

Are you worried about your nonprofit’s budget? Maybe you wonder if everything’s correct and done in the best way possible. Budgets can be a source of stress and anxiety, but they don’t have to be.

With some careful planning and a few tips on what to avoid, you can transform your budget into a helpful tool that’s right on the money. Here’s how to tame the budget dragon and get a handle on your organization’s financials.

Avoid common pitfalls. Prevent mistakes and build your nonprofit’s credibility. Strive to meet or exceed the expectations of your financials. How well your finances are put together determines the kind of work you can do. A sound budget enables your nonprofit to achieve its mission and realize its vision, as well as protect staff, executives, and board members. The health and livelihood of your nonprofit depend on the effectiveness of its budget.

Common Budget Mistakes Nonprofits Make

Here are some tips on what to watch for when working with your organization’s budget. Consider these top 10 common budget snares:

1. Too Few People Involved: One person can’t take on a task that’s best treated as a team-driven process. Don’t do it all yourself. Purposeful and effective budgeting is a group effort. Build a budget team which includes staff, executives and the board. From human resources, to fundraising, to program and volunteer coordinators, include everyone that you can. Their input will lead to a well-rounded budget that reflects every component of your nonprofit. Start with managers. They know what is crucial to get the job done in their areas and can pinpoint expenses down to exact amounts line item by line item and avoid unnecessary expenses. Develop your annual operating budget with plans derived from all programs and departments. Note: Larger nonprofits will need a budget for each department.
2. Not Enough Time to Prepare: Preparing a budget is a process which takes time to complete. Rushing things will not pay off. Establish a realistic timeline to put your budget together. A calendar with milestones can keep everything on track. Work backwards to pinpoint dates and deadlines for planning, reviewing and approving budget drafts. Keep in mind, these steps will probably take longer than you think. Begin the process several months before the end of your fiscal year.
3. Infrequent Budget Reviews: If your routine is to make budgeting a one-time annual event, increase your frequency. Periodic reviews are a must, and monthly or more is a best practice. Check that incoming revenue and actual expenses actually match the budget. If revenue falls short of projections, work to offset the imbalance. Either curtail expenses in some area or find a way to raise more money before the end of the year to offset expenses.
4. Incorrect Revenue Forecasts. Money must be coming in before an organization can do any spending. An accurate revenue forecast will set your nonprofit up to spend within its means and avoid the possibility of overspending. To set realistic revenue projections and estimate expenses, rely on accurate financial data and input from your team.
5. Forgetting Dates for Expenses: Be prepared to make payments at different intervals to cover irregular expenses. Take into account the timing of expenses by month, quarter, and year, as well as semi-annual payments and other variations in time.
6. Losing Track of Dollars Spent: Disorganization can destroy a budget. Be sure that money is actually spent on what it was intended to be used for and account for every dollar. Know what you need to cover, and include all expenses. Eliminate the possibility of any disparities. Carefully track everything. Save receipts and invoices in an organized manner by date, by program, by department, etc. (Not just in a pile somewhere.)
7. Depending on Last Year’s Budget: If there’s one thing COVID-19 made clear, it’s that ongoing change can come at a fast pace. No two months are alike and no two years are exactly alike. To accommodate, budgets will vary month-to-month and year-to-year. Avoid the temptation to use last year’s budget as a boilerplate. Instead, take a comprehensive look at your expenses and revenue.
8. Omitting A Reserve Fund: Establish and maintain a cash reserve. An adequate reserve of 3 to 6 months of operating expenses will enable your nonprofit to be financially prepared to deal with a crisis. Obviously, a larger six-month reserve would provide more security. “A nonprofit should plan, establish and maintain a financial reserve at a level determined by the organization’s management and board to adequately support its operations, and should have a feasible plan for dealing with sudden withdrawals of major funding sources. A recommended target for reserves is 3 to 6 months of operating expenses,” — From the Guiding Principles + Practices for Nonprofit Excellence in Maine, Maine Association of Nonprofits.
9. Not Investing in Future Improvements: Building a stronger organization requires an investment of resources, which takes money. Set aside what is needed to pay for training and other developmental opportunities. Your nonprofit can set a path to not only grow but to thrive through capacity building. It takes time and money to think creatively about new and better ways to do things. While capacity-building requires financial resources, it can pay off in the long-term growth of your organization.
10. Not Having A Financial Expert Involved: Nonprofits have an obligation to their customers and communities to act as responsible stewards. This includes the management of financial resources. Complying with legal financial requirements is a must. If your nonprofit does not have a financial officer available to help, hire a Certified Public Accountant (CPA), or tap into your board or volunteer resources. Budgets must be set up correctly. A CPA or other financial professional can get things in place to maximize efficiency, leverage finances, and protect the organization as a whole. A reputable CPA will adhere to accounting principles which ensure fiscal responsibility and produce reliable financial information.

Create Your Nonprofit’s Budget

Recognize the basics about budgeting. Knowing what you’re dealing with will take away some of its sting. A budget allows you to control and monitor revenue over time, but for a nonprofit, it’s more than numbers. Every line item translates into real things for real people. A well-prepared budget empowers your nonprofit to remain on a steady course, have direction and use its resources to the fullest. It’s where money and mission intersect.

The success of your nonprofit relies on you getting the budget right. The bottom line is you don’t want to underspend or overspend. A small budget error may not surface until it’s become a big problem that’s difficult to fix. The slightest misstep can have a cascading effect. Budgets support every part of a nonprofit’s work.

Aligning Budgets to Missions and Visions

Your nonprofit works hard to make the world a better place, but how are your financials – specifically your budget? Is your budget in keeping with your nonprofit’s values and goals? Align your nonprofit’s program goals with its financial goals and strive to creatively resolve any challenges. Make sure your budget supports your mission and vision.

Putting together a good budget requires a lot of planning, some common sense, and basic accounting skills. Use Excel or another spreadsheet program to organize calculations and lists. Even non-financial people can create budgets. The more you work with budgeting, the better you’ll be. The budgeting process is an opportunity to build business skills that will benefit your nonprofit. In the end, you’ll gain higher levels of confidence and authority as your financial acumen grows.

Sample Annual Organizational Operating Budget

A simple budget has three sections: revenue accounts, expense accounts, and the difference between the two. The bottom-line figure would amount to a small net surplus or loss.

This annual organizational operating budget provides template for outlining what is needed for a nonprofit budget for grant request purposes. The budget could be converted into an Excel spreadsheet to easily track calculations.

Sample organizational operating budget courtesy of William A. Bayreuther Grant Writing and the Maine Association of Nonprofits.

Better Budgeting

A budget lays out a road map for financial oversight and financial support. How well your finances are put together impacts how your nonprofit can provide services and help your community.

Create efficient systems that provide meaningful, accurate, and strategically useful reporting of financial information. Don’t just rely on last year’s budget and do everything yourself. Start your budget process early, involve a team, including a CPA or other financial expert. Allow enough time to get the budget done. Account for revenue, spending, and when payments are due. Invest in a reserve fund and capacity building. When it’s all done, frequently review your budget. With these factors in place, you’ll avoid common budget mistakes and have a great budget.

By Lee Ann Owens