How much of a nonprofit budget should be salaries? 2025

Donors and stakeholders demand transparency in how their contributions are utilized. Tom is a multi-disciplined leader with over a decade of experience in nonprofit operations, technology leadership in government, and over two decades of servant leadership. However, if you feel that it is more important to have a budget that is easier to create and that reflects past spending patterns, you may want to use a historical budget.

• This unpredictability can make it difficult to maintain a consistent income flow, leading to challenges in long-term planning and resource allocation.
• Although it’s never too late to make a budget, the process should ideally start two or three months before the beginning of your next fiscal year.
• Beyond basic income and expense tracking, build in space for context and analysis.
• A $5,000 copier machine could be a capital investment for a small organization while also below the threshold of a large organization.
• Budgeting is no different, especially because the entire document is based on predictions.
• Nonprofits should look to others in their field for more guidance on how much operating reserve cushion is appropriate.

How to Apply Your Nonprofit Budget

Involve your Board, your staff, and your volunteers in creating the budget and reviewing your revenue and expenses. This not only helps create a more accurate and comprehensive accounting services for nonprofit organizations budget but also ensures buy-in across the board. It’s also very important to the success of your programs that your revenue and expenses estimates are realistic. While there is generally space for hope and dreams in the nonprofit world, when it comes to budgeting – there isn’t. When putting in the numbers for your revenue, make sure you know exactly where your funds will come from.

Determining and Allocating Expenses

• Decisions on where to allocate resources should be guided by potential solutions, expected ROI, and overall impact.
• Once you have added all of your anticipated revenue and expenses, you can calculate your projected operating profit and projected operating margin.
• In the sections to follow, we will explore the steps and strategies that nonprofits can employ to effectively manage their operating budgets, ensuring they stay true to their missions and make a lasting impact.
• Adopting best practices for managing the operating budget, including transparency and accountability, strengthens donor trust.

A zero-based budget requires you to justify every expense from scratch each year, rather than simply adjusting the previous year’s budget. While more time-consuming, it can be beneficial for nonprofits to identify inefficiencies and prioritize resources. When an expense is clearly and exclusively incurred for a specific program area or cost center, we simply assign the expense to that program area or cost center.

Some other considerations might include:

This work is primarily done by the executive director, using empirical data about expenses and revenue, as well as any new expenditures and funding sources projected for the upcoming year. Allocating funds and prioritizing spending are both part of accounting services for nonprofits. For nonprofits like yours, financial planning is critical for effective fundraising and development. Now that you understand your nonprofit’s financial goals, it’s time to begin drafting your budget.

• Crafting an operating budget involves understanding revenue streams, planning expenses, and aligning with strategic goals.
• For more information on generating other forms of support, check out Keela’s comprehensive fundraising guide.
• Resource allocation is a strategic decision that determines the effectiveness of a nonprofit’s mission.
• Every organization’s budget will look slightly different, so make sure you can customize your chosen template to fit your needs and goals.
• As a general rule of thumb, nonprofits should set aside at least 3-6 months of operating costs and keep the funds in reserve.
• To help you get started, we’ve created a basic nonprofit budget template to track your revenue and expenses.

Building a nonprofit budget: 4 steps to get started

So yes, a general rule of thumb is that a higher proportion of a nonprofit’s budget should go to program expenses. Calculating your nonprofit’s overhead ratio is as simple as dividing the total overhead costs by the total amount of monthly income. A percentage higher than this might indicate https://namesbluff.com/everything-you-should-know-about-accounting-services-for-nonprofit-organizations/ spending that’s disproportionate to the amount of money a group can raise.

Context Is Key

Looking at just total revenue or total expenses can mislead you about how big an organization actually is. By only looking at expenses that are core to the actual daily operations of the nonprofit — and ignoring the rest — you can get a good idea of the actual size of a nonprofit. Even the financially or programmatically smallest nonprofits—often operated entirely with volunteers — have their knowledge of costs spread across two or more people. There are as many forms of nonprofit budgets as there are forms of organizations.

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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.

Understanding Net Assets in Nonprofit Organizations: A Guide for Stakeholders

As you steer your nonprofit through its financial journey, remember that each budget revision is an opportunity to invest wisely in your mission and amplify your impact on the community. Consider the fixed costs, such as rent and utilities, which are non-negotiable and recur with predictability. Equally important are the variable costs, including salaries, program expenses, and administrative overheads, which fluctuate in response to your nonprofit’s activities and strategic decisions.