How to Create a Nonprofit Operating Budget

Each nonprofit organization has its mission, set of programs, corresponding financial framework, and, importantly, an operating budget.

Helping Hands Monkey Helpers, for example, is a charity dedicated to pairing trained service monkeys with individuals suffering from mobility impairments. The organization manages the costs associated with overseeing each monkey’s training, service, and lifetime needs.

Additionally, the Tall Clubs International Foundation financially supports exceptionally tall members of society. This organization raises, manages, and disperses scholarship funds for tall individuals entering their first year of higher education. 

Clearly, the needs of society are incredibly diverse. . . and often quite strange. So, whether you’re training service monkeys or supporting the exceptionally tall, you need an operating budget that reflects your organization’s unique needs.

This article will discuss how to craft an operating budget tailored to your needs and requirements. Here’s exactly what we’ll cover.

What is a Nonprofit Operating Budget?

Put simply; an operating budget outlines an organization’s revenue and expenses for a fiscal year.

An operating budget is essential for your organization because it helps organize short-term goals. Additionally, budgeting provides a transparency mechanism, as it can communicate the management of resources to your stakeholders. 

What’s more, when creating your budget, you will find gaps in your operations where you could potentially save money or invest more. During this process, you will also benefit your organization by deciding what operations best advance your organization’s mission. 

Operational revenue and expenses are the critical components of an accurate and helpful operating budget.

When determining revenue, nonprofit professionals should forecast the resources their organization is likely to acquire. In the for-profit world, revenue is typically classified as resources earned from the sale of goods and services. 

Many nonprofits receive a lot of their revenue from activities that can be considered the sale of goods and services. These are activities like contracting out their services, selling memberships, providing fees for services, or selling merchandise and other goods.

However, nonprofit revenue often comes from other forms of support such as donations, grants, and different types of contributions. So, nonprofit revenue can be divided into traditional revenue (sales and services) and other forms of support (donations and grants). For more information on generating other forms of support, check out Keela’s comprehensive fundraising guide. 

When determining operating expenses, nonprofit professionals should forecast their organization’s resources needed to carry out its activities during a fiscal year. 

Here’s a list of operational expense categories that are important to consider:

1. Staff salaries and benefits
2. Rent and utilities
3. Equipment and supplies
4. Communications
5. Insurance 
6. Meetings
7. Travel
8. Marketing and advertising 
9. Training and development
10. Contracted-in services
11. Legal 
12. Accounting 
13. Fund development 
14. Miscellaneous

At the end of a fiscal year, a nonprofit will likely end up in a profit or loss position. A profit, or surplus, is the excess of revenues over expenses. Conversely, a loss, or deficit, is an excess of expenses over revenues. 

Nonprofits aim to generate a modest profit to preserve their financial sustainability. Having a carefully thought-out budget is one great way to get your organization going in that direction.

How to Create an Operating Budget for Your Nonprofit

Creating an operating budget begins where all nonprofit decision-making should begin: the organization’s mission. 

Every nonprofit has a mission, usually one that is quite broad. Let’s take the organization Contributing to the Lives of Inner City Kids (CLICK) as an example. CLICK works to raise funds for programs that support inner-city kids in Vancouver. Here’s its mission statement: 

CLICK’s mission is to engage the community by raising funds for programs that support inner-city kids so they can succeed.

Based on this statement, CLICK’s board of directors will have to determine specific objectives to achieve this mission. These objectives will lead to the creation of relevant programs or services which will have corresponding costs and revenue opportunities. These considerations, in combination with revenue forecasts, will make up the operating budget.

What is the difference between an Operating Budget vs. a Capital Budget?

Some confusion occurs when differentiating short-term and long-term objectives. This confusion brings us to a point where we need to differentiate between capital budgeting and operating budgeting. 

Capital budgeting is the process of making long-term capital asset investments and financing decisions. Capital assets are long-lasting assets that advance the organizational mission and assets, i.e., land, facilities, and costly equipment. These are sometimes considered fixed costs. 

Capital assets have to last more than a certain period and cost more than a threshold amount determined by an organization. Each organization will have a different definition of a capital asset. A $5,000 copier machine could be a capital investment for a small organization while also below the threshold of a large organization.  

Capital and operating budgets both support the organization’s mission by planning and managing resources. However, procedural differences exist between them. For example, capital investments typically take more than one fiscal year to pay off, which must be conveyed when budgeting.

Be aware that the capital and operating budget have a close relationship. Investing in a capital asset often results in indirect costs for operation and maintenance. Nonprofits should be prepared for the impacts of capital acquisitions, even if the assets are donated. 

How to calculate your operating budget

The easiest way to identify your operations budget is by looking at past behavior. Many nonprofit professionals do this by calculating their spending baseline: how much it would cost to maintain their current operations without changes to the previous year’s budget. 

The spending baseline is typically calculated during the auditing phase of the budget cycle, which we will discuss below. 

Another way to determine your operating budget is by splitting up the work. Consult your board, staff, and volunteers to understand what resources they require to effectively fulfill your organization’s mission.

Using both of these strategies will help your organization to stay closely aligned with its mission.
If you’re also wondering how to calculate your cash flows, download Keela’s cash flow forecasting tool! Use this simple resource to help balance your books and reduce your financial worry.

The Nonprofit Budget Cycle