3 Tips to Budget Efficiently With Limited Resources

3 Tips to Budget Efficiently With Limited Resources

If you’ve worked in the nonprofit sector for some time, you’ve likely heard the phrase “limited resources” used more times than you can count. Whether you’re trying to launch a new community program or plan an engaging fundraising campaign, it’s probably one of the first hurdles your team has to overcome.

Limited resources are exactly why accounting is so critical for nonprofits. Understanding where your organization’s revenue comes from and how it’s being used allows you to strategize more effectively to make the most of the funding you have. And it all begins with effective nonprofit budgeting.

In this guide, we’ll share three tips for creating an annual operating budget that uses your nonprofit’s resources as efficiently and impactfully as possible. Let’s get started!

1. Diversify Your Nonprofit’s Revenue Streams

All good budgets have two main sections: revenue and expenses. It’s most effective to organize the revenue side of your nonprofit’s budget by source—and generally speaking, the more sources you have listed, the better! 

Revenue diversification increases your organization’s resilience—if one source falls short of your annual budget’s predictions or you incur unexpected expenses, you’ll have more potential ways to make up the difference. It also helps you engage supporters more effectively since they’ll be more likely to contribute to your nonprofit if they can do so in their preferred way. 

In your funding mix, consider including sources from all five major categories of nonprofit revenue:

• Individual donations: This category includes monetary contributions from individual donors (or, as Convergent Nonprofit Solutions refers to them, investors) of all sizes—small, mid-sized, major, and planned—as well as in-kind donations of goods, services, and assets like stocks and real estate.
• Corporate philanthropy: According to Double the Donation, “Corporate philanthropy…refers to the ways in which a company gives back to its community or promotes the welfare of others.” Common examples include matching gifts, volunteer grants, and sponsorships.
• Earned income: While this revenue stream isn’t commonly associated with nonprofits, your organization can generate some of its own income through membership dues, merchandise sales, and fees for services provided (e.g., animal shelter adoption fees or museum ticket sales).
• Investments: This nonprofit revenue stream also isn’t the most common or lucrative. However, investing your organization’s reserve funds in low-risk vehicles like mutual funds, certificates of deposit (CDs), bonds, and treasury bills is a great way to steward and grow your otherwise limited resources.
• Grants: Whether they’re provided by the government or foundations, grants can provide critical funding for your nonprofit’s most important projects and programs. However, you’ll typically need to write a standout proposal and compete with other organizations to secure them. 

When planning out your nonprofit’s revenue, focus on cultivating sources that can become reliable, long-term funding streams. For example, promoting your recurring giving program allows you to trust that a certain amount of individual donation revenue will come in month after month. Additionally, building relationships with grantmakers and corporate sponsors makes it more likely that they’ll support your organization again.

2. Categorize Expenses by Function

There are two ways to categorize expenses in your nonprofit’s budget. The natural expense method is more straightforward, as it’s based on the nature of payments made. However, most organizations choose the functional expense method since it shows how each expenditure furthers your mission, which promotes greater financial transparency.

The three categories of functional expenses are:

• Program costs: These expenses directly further your nonprofit’s mission, meaning they can vary widely from one organization to another. For example, an organization that offers free after-school tutoring for students in low-income school districts might budget for books, school supplies, and snacks for participants in their program expenses.
• Administrative costs: These expenditures keep your nonprofit running day-to-day and include employee compensation, utility bills, insurance, and office equipment purchases, among other operational needs.
• Fundraising costs: These are the upfront expenses associated with revenue-generating initiatives, such as marketing material creation, fundraising software purchases, and fundraising consulting fees.

You may have also heard the term “overhead expenses,” which refers to your nonprofit’s administrative and fundraising costs combined. In the past, the general rule was that nonprofits should spend at least 65% of their funding on programs and no more than 35% on overhead. However, it’s now understood that this breakdown will look different for every organization.

When creating your budget, treat the 65/35 “rule” as a guideline to reduce overhead spending before taking any funding away from your programs. There are many simple changes you can make to accomplish this, such as:

• Auditing your tech stack to ensure you aren’t paying for duplicate software subscriptions.
• Looking into free marketing tools that your team can use without hiring a graphic designer.
• Having employees double-check that the heat or air conditioning is turned down and all lights are off when they leave your facility to lower utility bills.

Some overhead is essential for your nonprofit to thrive, and cutting certain costs can do more harm than good for your organization (for example, compensating your staff as promised is critical for employee retention). But starting small and ensuring all changes are reflected in your budget can add up significantly over time.

3. Check in With Your Budget Regularly

While you’ll create your operating budget from scratch once a year, effective budgeting isn’t a one-and-done process. Instead, meet with your leadership team and financial professionals at least once a month to assess your progress and adjust your strategy as needed.

Some tools you can use to help with your budget analysis include:

• Budget vs. actual comparisons. These documents show your real spending and fundraising numbers alongside where you expected to be at that point in the year. Since nonprofit financial activity fluctuates throughout the year (for example, individual donations tend to peak at year-end and die down during the summer), budget vs. actual comparisons should take these changes into account.
• Treasurer reports. In addition to listing your nonprofit’s monthly revenue and expenses, these reports compare your cash balance at the beginning and end of each month to provide a fuller picture of your financial situation. They’re also an opportunity for the financial expert on your board to provide their perspective on your nonprofit’s activities.
• Cash flow statements. According to Jitasa, these reports show how cash moves in and out of your organization through operating, investing, and financing activities. They summarize the data in your nonprofit’s accounting system so it’s easier to interpret and act on.

While you should stick to your budget as much as possible, the future is impossible to predict perfectly. If your spending and fundraising deviate from the plan, try to determine why the difference occurred and how you can course correct to continue making the most of your nonprofit’s resources.

The tips above should provide a solid foundation for creating an operating budget that maximizes your nonprofit’s limited resources. Consider your organization’s unique situation and needs as you plan, and don’t hesitate to reach out to your accountant, CFO, or another nonprofit financial professional with any questions or concerns along the way.