10 Nonprofit Budget Best Practices for Sound Financial Management

What do nonprofit budget best practices have to say about whether your budget should be balanced or have an overage? Does your board have standards for how to manage a deficit or how long to let it stay on the books?

Everyone has a different approach to how they manage money. While that works fine for your personal finances, your board acts and makes decisions as a unit. It’s essential for your board to be on the same page as it pertains to spending, reserving, and investing your nonprofit’s funds.

In the interest of helping your board get on sound financial footing, we’re providing an overview of why best practices for nonprofit budgeting are so important. We’ll top things off with 10 budgeting best practices for your board to discuss and consider incorporating into your financial policy.

Why Nonprofit Boards Should Get Acquainted with Best Practices for Budgeting

Perhaps your board hasn’t yet considered how critical it is to gain familiarity with best practices for budgeting. There are five reasons why your board should be intentional about budgeting.

1. Best practices for budgeting provide your board and staff with a consistent guide to help your board plan for your nonprofit’s current income and expenses. Also, best practices help your board plan for future income and expenses. Best practices stand as a guide for sound decision-making.
2. As stewards of the public trust, your board has a fiduciary responsibility to act and make decisions in the best interest of your nonprofit. Board members must take an ethical approach to managing finances. Good board members leave their own interests behind for the good of the nonprofit they serve. This responsibility falls under the board’s duty of loyalty.
3. The government’s intent is for nonprofits to remain sustainable for as long as possible. Nonprofits are subject to the rules and laws that govern them, and for compliance reasons, nonprofit boards must practice good financial practices. Good financial management falls under the duty of care.
4. Donors are particularly interested in your nonprofit’s budgeting principles and how your budget tracks over time. It’s a reflection of your nonprofit’s sustainability. Good financial practices motivate donors to write out a check. More importantly, nonprofit budget best practices instill confidence in your board ­– potentially enough confidence for them to add a few extra zeros to the donation amount.
5. Stakeholders count on the board to monitor the nonprofit’s budget and proactively manage it. They’re looking for assurance that your board is making wise and prudent decisions over spending and investing.

10 Nonprofit Budget Best Practices for Board Consideration

Best practices for nonprofit budgeting will cover most of the bases of responsible financial management. Be mindful that all nonprofits are unique, and your budget will reflect your nonprofit’s financial needs. Use the following 10 budgeting best practices as a basis for creating your nonprofit’s best practices.

1. Review financial reports at least quarterly. Give them more than a cursory look. Take note of any unordinary expenses. Don’t be afraid to ask questions about regular expenses, new expenses, and large expenses.
2. Approve your budget annually and place it in your board meeting minutes. It should be accessible to board members at all times.
3. Be transparent about your budget. Your donors and stakeholders will place more trust in your board and in your organization when they have the opportunity to see how much money is coming in, how much money goes out, and how you allocate funds.
4. Strive to equal or exceed your expenses. It’s good practice to have a reasonable amount of money allocated for cash flow to avoid having a deficit.
5. Address deficits immediately. Develop a plan for mitigating them. Take a deep look at expenses to determine if any discretionary costs can be eliminated or reduces.
6. Budget conservatively. Center budget discussions around the worst-case scenario so your nonprofit is continually prepared to deal with a crisis.
7. Consider committed revenues and uncommitted revenues separately. Donors may not come through with their promises, especially if they run into a crisis of their own. A sensitivity analysis will give your board data to understand the scope of potential revenue.
8. Take any restraints or limitations on gifts or grants into your budget. Some grantors may offer a grant with payouts over a period of months or years. Factor the revenue at the time it comes in. Also, be aware of any limitations of what you can spend grant or gift money on.
9. Evaluate this history of your budget. You may have larger expenses in certain months than others. Fundraising events and the timing of large donations also have a big impact on your budget. You can always amend your budget as necessary to account for variations.
10. Always be prepared for a financial crisis. Develop an alternate budget to fall back on in case a major funder falls through unexpectedly or your board is facing a major expense unexpectedly.

When reviewing your financial reports, be sure to view them in light of your cash flow and expense reports. If you spot a red flag, it’s best to catch it early and address it.

While board members may access your budget online or on paper, it doesn’t have to be a static file. Your budget stands as a guide, but you could also think of it as a living document. Visit your nonprofit’s budget often, just as you would your personal or business budget.

As another tip, create professional-looking budgets and keep them updated. Donors and stakeholders could ask for a copy of your budget or Form 990 at any time. Responsive nonprofits demonstrate that they’re prepared and proactive. When someone asks for a copy of your budget, it’s a good time to point out how often your board reviews its budget. Fundraising is highly competitive, and your board won’t want to miss even one opportunity to receive financial awards.

Your BoardEffect board management system enables your board members to have total access to a copy of your nonprofit budget best practices 24/7 every day of the year. It also gives them instant access to their board books, meeting minutes, reports, and all other board information any time they need. BoardEffect is a comprehensive, all-in-one secure platform for all you board meeting needs.