Why Is Budgeting Important for Nonprofits?

Did you know that there are over 1.5 million non-profit organizations in the USA right now? Whether charities, private foundations or fraternal organizations there are more non-profits than ever before. 

If you are considering opening or running a non-profit organization you may have many questions. Should I run my non-profit in the same way as a business? How should I run the finance of my organization? Why is budgeting important?

While some aspects of your organization may resemble a business, you may wonder why budgeting is important for a company that does not make a profit?

If this is the case, why not take a few minutes to read our in-depth guide below.

1. Setting and Reaching Goals

The purpose of setting up a non-profit organization is to accomplish its objectives. This could be a charity helping the homeless, or to support some other cause. Without a clear awareness of how much money is available to fund its initiatives, the organization will be limited in its goals. 

A non-profit could unknowingly set lower goals than necessary because of a lack of awareness of how much money is available. Further, if income will arrive at a future time during the next calendar year, but this is not accounted for when setting goals, this could slow the progress of the organization.

2. Financial Checks and Controls

Like every company, a non-profit organization has expenses that need to be checked and approved. Accurate budgeting allows you to keep costs under the expected revenues of the organization. 

Whilst nonprofit accounting may not be subject to the same checks and balances as a profit company, the danger of overspending can be just as real. Control this from the start with a strict and accurate budgeting policy.

3. External Monitoring

Since non-profit organizations by definition do not generate funds internally, they are often supported by outside sources. These outside sources will likely want to know that their money is being used efficiently and honestly.

Having a practice of creating a budget will show to others that you take their money seriously. Further as a result of your budgeting, you will have created documents that can provide how money is spent.

4. The Bigger Picture

The question “can we afford to do this?” will never have to be asked if your budget strategy is sound. Each department of the organization will know their budget for the year or shorter periods and be able to plan their projects appropriately.

5. Future Planning

As a non-profit becomes more confident in allotting money for each annual period, they can begin to plan larger expansion with the future in view. As this year’s budget is spent wisely and in a manner that reflects good planning, the board and key-decision makers will grow in confidence. 

The result of this will be that they will approve greater projects that further promote the mission of the organization.

6. Measure the Value of Fundraising

Many non-profit organizations will plan fundraising activities throughout the year to bring in the financial support that they need. Budgeting has a clear connection with the success of these events. 

The money gained from fundraising events should be measurable. It should be possible to show exactly how much was raised from the previous year’s events and on the basis of this predict income for the following year.

Following this, you will be able to compare the success of the fundraiser with the message that was promoted at the event. What part of your mission do people most subscribe to? Why do they contribute generously to one event but not another?

With careful measuring and budgeting of the benefits of these events, you can plan even more profitable events the following year.

7. Measure the Financial Health of the Organization

The goal of a non-profit is to pursue the mission behind its name. Whether to support the homeless or provide educations or some other cause, a person passionate about the cause started the organization.

However, the person passionate to start the organization may not be experienced in financial affairs. Or perhaps that are so passionate they do not wish to involve themselves in the day to day financial planning of the organization. This can be a danger to the long term financial health of the organization.

They may not be aware of the need to count costs and remain compliant with government standards. In other cases, the nonprofit may be financially viable but funds not used in effective ways. this can lead to a lack of support from donors who are disappointed in the lack of progress made. 

The solution to this is to surround the passionate board members with a financial team that is savvy to good financial management. Whilst not restricting the activities of the governing body of the institution, they can provide solid guidance and reminders regarding the reality of the situation. 

With individuals with a strong background in finance working with those passionate for the cause of the organization, fast progress can be made. Budgeting is the first step to making this progress. 

Why Is Budgeting Important? and other Important Questions

If you have asked the question “why is budgeting important?”, you have now learned the answer. Managing a non-profit organization requires many skills. You likely already know the importance of good organization and planning.

If you are looking for further guidance regarding the management of non-profit organizations, we are here to help. We leverage our years of experience in the business world to provide guidance that you depend on. Why not follow our blog to find out more about what we can do for you.