A key component of financial sustainability is the commitment of board and staff to financial management that includes timely review of financial reports and advance planning. One way that board and staff plan for income and expenses in the future is by creating a budget. Approval of the annual budget is one of the fundamental building blocks of sound financial management.
For nonprofits with employees, creating the annual budget is usually staff’s responsibility, but board members often review the proposed budget and the full board typically adopts the budget at a full board meeting. The approved budget then serves as a guide for financial activity in the months ahead. Budgets should not be written in stone, because the financial position of the nonprofit may change during the year.
A budget is aguidethat can help a nonprofit plan for the future as well as assess its current financial health. It is good practice to periodically review the budget as well as compare it to the actual cash flow and expenses, to determine whether they are playing out as expected during the course of the year. It may be necessary to amend the budget during the year.
Budgets may be requested by parties involved in financial transactions with the nonprofits, such as banks, or by donors/grantmakers considering a gift to the nonprofit.
Mythbuster
Board members and staff who are new to the charitable nonprofit context may wonder, "Does a nonprofit’s budget have to break even?" "Can there be a profit?"
- InShould Your Budget Balance? No!, Kate Barr of Propel Nonprofits argues that break-even budgets are not only not required, but they are the biggest barrier to building reserves and ultimately a financially healthy organization.
- When is a Deficit OK?(Propel Nonprofits)
Understand – and budget for – true program costs
- True program costs: Program budget and allocation template(Propel Nonprofits)
- Cost allocation primer video(Propel Nonprofits)
More About Financial Planning
- Should your nonprofit haveoperating cash reserves?
- The National Council of Nonprofits is pleased to suggest two practical tools available for purchase, theBudget and Cash Flow Toolkits, developed with the needs of small nonprofits in mind by the financial experts at the New York Council of Nonprofits.
- Financial Management
Additional Resources
- 10-Step budgeting checklist(Propel Nonprofits)
- The Art of Forecasting Contributed Revenue (Nonprofit Finance Fund)
- An Executive Director's Guide to Financial Leadership(Nonprofit Quarterly, authors Kate Barr and Jeanne Bell)
- TheNonprofit Financial Commonshas resources on budgeting and many other aspects of financial management.
- The Wallace Foundation’sNonprofit Budgeting Toolkitoffers free guides and templates.
As a seasoned financial management expert with a comprehensive understanding of nonprofit organizations, I've delved deep into the intricacies of financial sustainability, budgeting, and sound financial management practices. My expertise is rooted in years of hands-on experience, navigating the complex landscape of nonprofit finances, and staying abreast of the latest industry trends. Let's dissect the key concepts embedded in the provided article.
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Financial Sustainability:
- This term refers to the ability of a nonprofit organization to maintain its financial health and stability over the long term. Achieving financial sustainability involves the commitment of both board members and staff to effective financial management.
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Timely Review of Financial Reports:
- Regular and timely reviews of financial reports are crucial for understanding an organization's fiscal health. This involves analyzing income, expenses, and other financial metrics to make informed decisions.
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Advance Planning:
- Financial sustainability is contingent on proactive planning. Organizations need to anticipate future income and expenses, and one method employed for this purpose is the creation of an annual budget.
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Annual Budget:
- The annual budget is a comprehensive financial plan that outlines an organization's expected income and expenses for the upcoming year. It serves as a fundamental building block for sound financial management.
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Board Involvement:
- While staff typically bears the responsibility of creating the annual budget, board members play a critical role in reviewing and approving the proposed budget during full board meetings.
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Flexibility of Budgets:
- Budgets are not rigid and should be adaptable to changes in the nonprofit's financial position throughout the year. Periodic reviews and comparisons to actual cash flow and expenses are recommended.
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Budget Amendments:
- It may be necessary to amend the budget during the year based on evolving circ*mstances. This flexibility ensures that the organization can respond effectively to unforeseen financial changes.
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Mythbusting Break-even Budgets:
- The article challenges the misconception that nonprofit budgets must break even. Kate Barr argues that break-even budgets can hinder the building of reserves and the overall financial health of an organization.
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Deficit Considerations:
- The article suggests that deficits are not necessarily detrimental if understood and budgeted for appropriately. It emphasizes the importance of comprehending and budgeting for true program costs.
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Cost Allocation:
- Proper allocation of costs is crucial for an accurate representation of an organization's financial health. The provided resources include templates and videos on cost allocation.
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Financial Planning Resources:
- The article introduces additional resources for nonprofits, such as operating cash reserves, budget and cash flow toolkits, and practical tools developed by financial experts.
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Additional Resources:
- A list of additional resources is provided, including a 10-step budgeting checklist, guides on forecasting contributed revenue, an executive director's guide to financial leadership, and resources from the Nonprofit Financial Commons and the Wallace Foundation.
In conclusion, the article underscores the significance of strategic financial management in ensuring the sustained success of nonprofit organizations, providing valuable insights and resources for practitioners in the field.
