How to Construct the First Nonprofit Budget
In many businesses and nonprofit organizations, the annual budget is made by looking at what happened in the previous year and adjusting numbers up or down based on the work that lies ahead. When you're starting something new, however, you have no previous year's results to consider. In that case, you start with zero and carefully consider each number you use to build your plan.
A budget has two key sections — income and expenses. Because dreaming up expenses that exceed your organization's means is easy, you should begin with income, making conservative estimates for what you may earn and what you may attract in contributions.
It's common to separate your income statement into two general categories, "earned" and "contributed," also called "revenue" (contract or fee income) and "support" (grants and contributions), respectively.
Here are some common questions to ask yourself as you begin developing the income section of your budget:
Will you offer services or products for which you'll charge money? How many services and how often? How many people are likely to use them? What can you reasonably charge?
Can you sell memberships to people and give them premiums or discounts in exchange for paying those fees?
Are the founders and board of your organization able to contribute some start-up funds? Are they willing to talk to their friends and associates about contributing?
Is your organization well positioned to receive a grant or grants?
Are you capable of sponsoring a fundraising event?
Could you provide visibility to a business sponsor in exchange for a contribution?
In anticipating expenses, start with anything concerning payment of people. That list may include the following:
Salaries for employees, both full time and part time: On your budget, list each position by title and identify the full-time salary and the percent of full time that person is working for you.
Benefits for salaried employees: At a minimum, you need to pay approximately 12.5 percent of salaries to cover federally required benefits, such as Social Security, workers' compensation, and unemployment tax contributions. Some states also require disability insurance.
Many organizations provide paid leave to employees for vacations, illnesses, or jury duty. Your organization also may provide health insurance or a retirement plan to its employees. If so, you want to compute those costs as percentages of your total salaries and include them in your budget as benefits.
When setting up your employee benefits, check on both federal requirements and rules in your state. The United States Department of Labor website is a good guide to the federally required employee benefits.
Fees for services to consultants or service agencies: You may hire a publicist, grant writer, evaluator, or other consultant to handle important tasks. Such consultants are responsible for paying their own tax and insurance costs. Show fees paid to consultants after salaries and benefits in your budget.
Next, identify all the nonpersonnel expenses, beginning with ongoing operating costs that allow your organization to offer programs.
Telephone and Internet expenses
New organizations often have special start-up costs for the first year. For example, you may need to purchase desks and chairs, computers, signs, shelving, and office cubicles; and you may need to pay for training new staff members, first and last months' rent, the telephone and Internet hookup costs, and a photocopier or postage machine lease.
Finally, you may have costs associated with the specific nature of the work of your organization. These expenses range widely but can include diagnostic tests, carpentry tools, classroom supplies, and printed materials.
As much as possible, keep notes in your budget files about the estimates you made while drafting your budget. Keeping a worksheet helps you remember your assumptions and follow your budget.