Why Your Nonprofit Needs Program Budgets (and How to Build a decent One)
Very few of us get up in the morning pumped to build a budget. (I love crunching some numbers, but I was voted “Teacher’s Pet” my senior year of high school and had my picture taken with my favorite teacher for the yearbook.) For those of you who actually enjoyed your youth, you probably find budgeting a necessary, albeit unexciting, component of keeping your organization running. In the nonprofit space, it’s easy to focus more on mission-driven activities than the drudgery of financial matters.
But I’m here to tell you that ignoring the nuances of budgeting can be a costly mistake. Over the years, I’ve found far too many nonprofits — even those run by amazing leaders spearheading incredible initiatives — make the error of waiting too long to develop program-specific budgets. They rely on the organization’s general budget to make appeals to donors and foundations or map out their nonprofit’s priorities. While organization-wide budgets are essential, they don’t offer the granularity needed to (1) understand each program’s specific goals, (2) determine a program’s specific needs, or (3) ensure that goals and resources are aligned to build initiatives that get the job done.
Top 3 Benefits of Building Program Budgets
Effective Communication and Alignment
One of the most significant advantages of a program budget is its role in internal communication and ensuring alignment with broader objectives. It enables program directors and managers to articulate the financial needs and constraints of their projects in a language that is universally understood across the organization. This level of clarity is not just beneficial for budget discussions but is vital for the strategic allocation of resources. It helps staff at all levels to align their tasks and responsibilities with the available funding, ensuring that everyone is on the same page. Additionally, program budgets act as a financial mirror of a program’s objectives, reflecting its goals in monetary terms. This ensures that each program is in alignment with the organization’s larger mission and vision. It creates a transparent and accountable framework within which each program can operate, providing a clear roadmap for achieving the desired objectives.
Data-Driven Decision Making
Program budgets act like a financial magnifying glass for nonprofit organizations. They break down the costs and income of each individual program, allowing you to see where your money is coming from and where it’s going. This detailed view is crucial for spotting issues early on. For example, if one part of a program is consistently going over budget, you can identify this quickly and figure out why it’s happening. This enables organizations to make adjustments on the fly, ensuring that resources are being used efficiently.
In addition to helping with day-to-day management, program budgets also play a vital role in long-term planning. By looking at past and current budgets, you can make educated estimates about future costs and revenue, making your organization more resilient and better prepared for unexpected challenges. These budgets also help link financial expenditures directly to program outcomes, like how many people were helped or what kind of impact was made. This makes it easier to show the real-world value of a program, which is something that both leadership and donors appreciate. Overall, a program budget goes beyond just tracking numbers; it serves as a dynamic tool that helps nonprofits operate more effectively, plan for the future, and demonstrate their impact.
Funding and Grants
Program budgets are often a required component in grant applications and serve a dual purpose in both the application and post-award phases. Most funding organizations expect a detailed financial plan alongside your grant narrative to ensure that your project is feasible and that the grant money will be put to good use. In this sense, having a comprehensive program budget prepared can streamline the application process, saving time and effort. Your program budget not only substantiates the grant narrative but also sets a benchmark for how the funds should be allocated and spent, fulfilling the grantor’s requirement for detailed financial planning.
After the grant is awarded, many funders require periodic financial reporting to ensure accountability and proper use of funds. A well-structured program budget transitions smoothly into this reporting phase. Since the budget outlines your original financial plan, it provides an established framework that can be easily compared to actual spending. This makes it simpler to prepare the financial reports that grant organizations require for accountability. Moreover, it offers an opportunity to demonstrate the effectiveness of your program by comparing the planned budget to actual outcomes. By showcasing how closely you’ve adhered to your budget while achieving your stated objectives, you build a stronger relationship with funders, making it more likely that you’ll be considered for future grants (which is always a good thing).
Getting Started with Program Budgets
If you’re new to the concept of program budgets or have found past attempts to create them cumbersome, never fear! There are a few easy ways to get the process started.
1. Simplify the Chart of Accounts
Complexity is often the enemy of execution. A complicated chart of accounts can quickly become a nightmare for anyone trying to develop a program budget. (I’m talking about account titles like “pizza money for Tuesday night community events” and “conference tickets to the March 2023 Tony Robbins event”.) To make life easier, start with a simplified chart that includes standard accounts such as ‘Salaries,’ ‘Utilities,’ and ‘Rent.’ Tools like QuickBooks enable this kind of tracking without the need for creating a multitude of specific accounts. I’d (strongly) recommend working with a certified accountant on this. Not only do you want a clean set of books that take the headache out of running your nonprofit — you want to stay out of jail. 😉
2. Start with Core Expenses
To craft a program budget, you’ll need to identify all the basic costs associated with running the program. These core expenses can be broken down into several categories:
Staffing Costs: Calculate salaries, benefits, and any additional compensation for the personnel who will run the program.
Materials and Supplies: Estimate the costs of essential materials, equipment, and software necessary for the program.
Utilities: Account for the utility costs that can be directly attributed to the program, such as electricity, water, and internet charges.
Other Overheads: Include costs such as rent or lease of space, insurance, and licensing fees that may apply specifically to the program.
By identifying and categorizing these core expenses, you establish a foundation upon which the rest of the budget can be built.
3. Include Revenue Projections
Understanding your revenue sources is crucial for any budget. This includes:
Donations: Project the amount of private donations that the program is expected to receive.
Grants: If you’re applying for grants or have secured them, include these figures in the revenue projections.
Other Income Streams: This could be anything from selling merchandise related to the program to ticket sales for fundraising events.
Knowing your expected income will help balance the budget and provide insights into any funding gaps that need to be filled.
4. Allocate Overhead Costs
Allocating overhead costs can be a contentious issue but is essential for a realistic and sustainable program budget. These are the indirect costs that can’t be directly attributed to any one program but are essential for running the organization. This can include:
Administrative Costs: Salaries and benefits for executive and administrative staff, office supplies, etc.
Facilities Costs: Rent, utilities, and maintenance for the spaces not used exclusively by one program.
A commonly used approach is to allocate these costs proportionally based on the percentage of each program’s direct costs relative to the organization’s total direct costs.
Hannah Montana was Right…Nobody’s Perfect
While I know this incredibly cheesy joke will only be appreciated by a very small group of Millennials who had Disney Channel in their cable bundle growing up, Hannah was on to something back in the day. If you find that your financial records are disorganized and keeping you from building those program budgets, remember that it’s never too late to clean things up. As author and theologian C.S. Lewis wisely stated (perhaps more perceptively than Miley Cyrus), “We all want progress, but if you’re on the wrong road, progress means doing an about-turn and walking back to the right road; and in that case, the man who turns back soonest is the most progressive.” Getting your finances in order and developing program budgets can serve as your pivotal “about-turn” — leading your organization towards more robust funding, enhanced accountability, and a deeper impact in the community you serve.
Next Steps
While organization-wide budgets are useful for a high-level view, they simply can’t capture the detailed financial picture that program budgets provide. The benefits of adopting program budgets extend far beyond just better bookkeeping; they improve internal communication, increase accountability, and enable smarter decision-making. If you’re looking to fine-tune your operations, foster trust with donors, and make your nonprofit more effective overall, implementing program budgets is a practical and impactful step. If your organization hasn’t yet taken this step, consider this your invitation to start. Yes, it will take some effort, but the positive ripple effects on your mission and community will make it more than worthwhile.
