Building Budgets That Work: Practical Financial Planning for Nonprofits

A solid budget is one of the most powerful tools nonprofits and small businesses have for staying financially healthy and mission-focused. In November, we welcomed back Mike Hablewitz from Wegner CPAs to share practical insights on creating and managing effective budgets.

One of Mike's most repeated points was simple: start early. Too many organizations don't approve their budgets until months into their fiscal year. By then, spending can drift off course without that crucial benchmark in place. The budget should be ready before the period it covers begins, ideally approved at a board meeting in November or December for organizations with a calendar year end.

Think of your budget as more than numbers on a spreadsheet. It's a roadmap that helps you forecast problems and opportunities, keeps resources aligned with your mission, and promotes fiscal responsibility across your organization. When done right, budgeting becomes an ongoing process, not a once-a-year exercise you file away and forget.

Getting the Foundation Right

Mike walked through several essential elements of effective budgets. Most organizations should use accrual-based budgets, which match your financial statements and give you a more accurate picture than cash basis accounting. Accrual basis captures expenses when you incur them, not just when you pay them, which prevents the misleading appearance of strong finances if you simply delay paying bills. Your budget line items should mirror your actual financial statements. If you're tracking 25 expense categories in QuickBooks, your budget should have those same 25 lines. This makes comparing budget to actual results straightforward and meaningful. Fixed costs like rent and salaries are easier to budget accurately, while variable costs that depend on service levels or other factors require more attention and realistic assumptions.

Not everyone reviewing your budget will have strong financial expertise. Budget narratives, written descriptions that explain your assumptions and justify new or significantly changed line items, help board members and other stakeholders understand the numbers. These narratives are particularly valuable when costs change substantially or when you're adding new expenses.

Monitor Monthly and Focus on What Matters

Creating the budget is only the beginning. Mike emphasized monitoring actual results against your budget every month, even if your board doesn't meet that frequently. This regular review helps you spot trends early, both positive and negative. When analyzing variances, focus on what matters. Set both dollar and percentage thresholds so you're not getting into the weeds over small differences. A $200 variance on a $1,000 line item probably doesn't warrant extensive discussion, even though it's 20 percent over budget. Similarly, a $10,000 variance on $1 million in wages might only be 1 percent, which may not require deep analysis either.

While accrual-based budgets are recommended, organizations still need to understand cash flow. Mike shared a helpful framework: take your projected net income, add back depreciation (since you're not writing a check for it), then subtract debt principal payments and capital purchases. This gives you a realistic picture of how your budget will affect your actual cash position.

When budgeting for a net income, consider earmarking part of it for reserves. While putting money in a reserve account isn't an expense, you can treat it like one below the line in your budget. The general rule of thumb is to maintain at least three months of operating expenses in liquid reserves, with six months being even better. This cushion protects you when unexpected expenses arise or revenue dips temporarily.

When Plans Change

Budget revisions should be reserved for substantial changes, not minor variances. If you lose a major grant mid-year or experience another significant shift in your operations, a revision makes sense. But if an expense line comes in 50 percent higher than budgeted, don't automatically amend the budget to match. That variance tells you something important about your planning or operations that you need to understand for future budgets.

Several attendees asked about budgeting when grant funding is uncertain. Mike's advice was to create multiple scenarios: your most realistic budget based on best estimates, plus what-if scenarios showing the impact of different funding levels. Once the situation clarifies, you can settle on the appropriate version and move forward.

Effective budgeting shows fiscal responsibility, helps you make better decisions, and gives everyone in your organization clear expectations. It takes some work up front and consistent monitoring throughout the year, but the payoff in financial stability and strategic clarity is worth it.

We're grateful to Mike for sharing his expertise with our community. If you have questions about budgeting or other financial planning topics, our Nonprofit team is here to help you work toward what's next.

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