A nonprofit budget should answer a pretty basic question: What will it take to accomplish our mission this year, and how are we going to pay for it?
Yet the budgeting process can easily become an exercise in updating last year's spreadsheet. Salaries go up a few percentage points. Insurance gets adjusted. Revenue assumptions get carried forward. Before long, the new budget looks a lot like the old one.
Zero-based budgeting offers another approach.
During a recent Park Bank webinar, Nick Curran, founder of Numbers for Nonprofits, spoke about using zero-based budgeting to make more intentional financial decisions.
Here are some of the biggest lessons from their conversation.
What is zero-based budgeting for a nonprofit?
Zero-based budgeting is a budgeting method that starts each planning period from zero rather than automatically using the previous year's budget as the baseline. Each major expense and revenue assumption is reconsidered based on what the organization expects to accomplish in the coming year.
That doesn't mean ignoring history.
If your organization spent $12,000 on office supplies last year, that information is useful. But rather than automatically budgeting roughly the same amount again, zero-based budgeting asks why the expense is needed and whether it still fits the organization's priorities.
For nonprofits, that brings the mission directly into the budgeting conversation.
Start by asking:
What do we want to accomplish this year? What people and resources will that require? And what funding can reasonably support it?
That conversation should include program, fundraising, finance and administrative perspectives. The goal is to build the budget around the work ahead instead of simply adjusting the work you've done before.
1. Start with your people
For many nonprofits, personnel is the largest expense. That makes staffing one of the first areas to address in a zero-based budget.
Look beyond annual salaries. Your true personnel budget may also include payroll taxes, health insurance, retirement contributions and other benefits. In the webinar example, benefits and related costs added almost 25% above salaries.
Then consider how each position will be funded.
Is the position supported by a specific grant? Is that grant continuing? Will unrestricted dollars cover some of the position? If funding isn't secured, are reserves available to bridge the gap?
Compensation belongs in this conversation too. Instead of automatically assuming a cost-of-living adjustment, model what your nonprofit can reasonably afford. If finances are tight, one option discussed in the webinar was beginning with a smaller adjustment and revisiting compensation later in the year if financial results allow it.
The same thinking applies to benefits. Salary, health insurance and retirement contributions all compete for limited resources, and together they affect your ability to recruit and retain people.
2. Budget grant and program expenses carefully
Once personnel is mapped out, turn to the direct costs of fulfilling your programs.
A grant-funded initiative might require contractors, printing, outreach, stipends or other expenses. Those costs need to appear in the organization's operating budget during the period in which they will occur, even when the grant's timeline doesn't match the nonprofit's fiscal year.
This is where budgeting can become complicated.
Suppose a $120,000 grant runs from October through September, while your nonprofit operates on a calendar year. Only the portion applicable to the upcoming calendar year should inform that year's operating plan. Then you'll need to decide whether future funding from that source is predictable enough to include.
That leads to an important question:
How much of your expected grant revenue can you reasonably count on?
A conservative budget separates funding that is predictable and repeatable from grants your organization hopes to win.
3. Understand what restricted dollars really cover
A large grant doesn't necessarily fund the full cost of delivering a program.
Cost-reimbursement grants require organizations to incur eligible expenses before recognizing or requesting reimbursement. And a grant's allowance for administrative or indirect expenses may be lower than your nonprofit's actual overhead.
If your true overhead is 20%, for example, while funding only covers 10% or 15%, the difference still has to be paid somehow.
That gap may need to come from unrestricted contributions or other fundraising.
This is one reason zero-based budgeting can be so useful. Instead of seeing a grant award as a single revenue number, you're matching that revenue to the actual costs necessary to deliver the work.
4. Look at fundraising by what it actually produces
Events can generate a lot of revenue on paper. The better budgeting question is how much they contribute after costs.
If a fundraising event generates sponsorships, ticket revenue and auction proceeds, show the gross revenue in the budget. Then separately account for the venue, food, entertainment and other expenses.
And don't forget staff time.
As Curran put it during the webinar, make sure “the juice is worth the squeeze.”
An event that nets $15,000 but demands significant staff time may deserve a different strategic discussion than an event that generates hundreds of thousands of dollars after its costs.
The same principle applies to your broader revenue mix. There isn't one perfect percentage of grants, events and contributions for every nonprofit. Your assumptions need to be attainable based on your donor relationships, staff capacity and board commitments.
Unrestricted giving can be particularly valuable because those dollars give an organization more flexibility. Recurring monthly donations may also add predictability to that revenue stream.
5. Plan for debt with a surplus
One of the more easily overlooked pieces of nonprofit budgeting involves debt.
For accounting purposes, a mortgage payment isn't simply one large expense. The interest portion is an expense, while principal repayment reduces the liability.
That means an organization paying down principal needs enough cash generated elsewhere in its budget to make those payments.
The webinar offered a useful example. If monthly mortgage payments include roughly $5,000 in principal, the organization would need about $60,000 in annual surplus cash flow to cover a year's principal payments.
That same thinking applies to paying down a line of credit or prior-year payables.
A surplus isn't automatically "extra" money. Sometimes it already has a specific job.
6. Build replacement reserves before something breaks
A roof eventually needs replacing. So does carpeting. And computers don't last forever.
Replacement reserves give nonprofits a way to prepare for those costs before they become an emergency.
If your organization expects a $20,000 roof replacement 10 years from now, setting aside approximately $2,000 per year provides a basic planning model.
The same approach can be applied to computers, furniture, equipment and other assets.
For nonprofits with buildings or other significant fixed assets, consider maintaining a capital budget alongside the operating budget. Identify the assets you'll likely need to replace, estimate when those expenses will occur and decide how much the operating budget can contribute to reserves each year.
7. Budget for cash flow, not only revenue and expenses
A financially sound annual budget can still create a cash crunch.
Imagine your nonprofit has a reimbursement grant that produces $50,000 of eligible expenses every month, but reimbursement takes time. You could temporarily have $100,000 or $150,000 tied up in grant receivables.
The revenue may be coming. Payroll still needs to be made in the meantime.
That's why budget conversations should also include cash reserves and access to a line of credit.
Other items can create similar differences between accounting results and cash flow. Multi-year pledges, restricted contributions and endowment distributions all require careful treatment.
Your budget and cash forecast should work together so leadership understands both how the year is expected to perform and whether the organization will have enough cash at the right times.
8. Give the board the right role
How involved should your nonprofit board be in the budget?
The webinar discussion pointed toward a practical middle ground. A board that gets too deep in individual expenses can lose sight of strategy. A board that simply rubber-stamps a budget isn't asking enough questions.
The board's value is in challenging the assumptions behind the plan.
For example:
- How does projected fundraising compare with prior results?
- How much new grant revenue are we assuming?
- Is that expectation realistic?
- What role will board members play in fundraising?
- Are compensation and benefits sufficient to retain staff?
- What financial results will the board expect leadership to deliver?
Clear expectations matter especially on fundraising. If the budget depends on the board opening doors or raising a certain amount, everyone should understand that commitment before the budget is approved.
9. Don't put the budget on a shelf
Your budget will probably be wrong.
That isn't a failure. People leave or go on leave. Positions take longer to fill. New grants arrive. Planned funding doesn't. Expenses change.
The useful question is how quickly your organization responds.
Curran recommends budgeting monthly, then replacing budgeted months with actual results as the year progresses. That creates an updated forecast.
For example, if you budgeted $22,000 in monthly payroll but are running closer to $20,000 because a position remains open, update the forecast. Then look at how the latest projection compares with the original budget and what that change means for year-end cash.
In other words, the annual budget sets the plan. Forecasting tells you where you're actually headed.
Park Bank