Your nonprofit’s budget is the central document that informs its financial decisions. It’s a tool to allocate funds in a way that pushes your mission forward.
While budgeting may seem like a straightforward process, many charitable organizations encounter roadblocks. Since nonprofits are often tight on funds and future federal funding for many organizations is uncertain, building a proper budget is complex yet necessary for the success of nonprofit missions.
This guide will walk you through common budgeting mistakes nonprofits make and how to avoid them. That way, you can successfully develop a budget that advances your mission and keeps your organization sustainable.
1. Failing to Plan for the Long-Term
Many nonprofits build their budgets for the immediate fiscal year without considering how today’s decisions impact the future. A short-term focus can leave organizations unprepared for unexpected expenses or shifts in funding, preventing them from achieving sustainable growth.
When nonprofits don’t look ahead, they may lack the reserves or infrastructure to handle increased demand, staff changes, or new strategic priorities. This shortsightedness can delay or derail progress on mission-critical initiatives.
For example, if you run a homeless shelter, you’ll want to have enough funds saved to keep up with increased demand in the event of a natural disaster that leaves a significant part of the community without housing.
How to Avoid This Mistake
- Integrate multi-year financial planning into your annual budgeting process. Consider how new programs, staffing changes, and strategic goals will affect your budget in two to five years.
- Build a financial reserve that your nonprofit can tap into in dire situations. You may also leverage scenario planning to create plans for different potential financial positions so you can quickly pivot.
2. Overestimating Revenue
Nonprofits may overestimate earned income from events or services and revenue from uncertain sources like grants and donor appeals. Factors like economic volatility and shifts in community demand can impact nonprofits’ earning potential.
Although remaining optimistic boosts morale on your nonprofit’s team, being too optimistic about your revenue generation can create major gaps between income and expenses. When anticipated funds don’t materialize, you may have to scale back programs or cut staff unexpectedly, leading to worse outcomes for your organization, team, and community.
How to Avoid This Mistake
- Be conservative with your projections. Base estimates on past performance data and current funding commitments to create a budget that aligns with your organization’s history and future state. Consider possible external factors that can impact incoming revenue. Market trends and fluctuations in federal funding, for example, can limit grant funding and how much donors are willing or able to contribute.
- Recognize any seasonal variations that may cause revenue to fluctuate. For example, you may find in your financial data that the summer is a slow period for individual donations, prompting you to keep projections low during this time and host extra fundraising events.
3. Underestimating Expenses
On the other hand, many organizations may underestimate expenses by overlooking small costs that add up. For example, if you’re planning a capital campaign, you may remember to budget for a nonprofit consultant and large fundraising events, but you may neglect expenses like software to facilitate stakeholder surveys or gifts to thank supporters for their participation.
Failing to budget for rising vendor costs, increased service demand, or inflation can also lead to financial strain mid-year. When expenses outpace income, nonprofits may have to divert funds from mission-critical activities.
How to Avoid This Mistake
- Encourage each department to review past spending and forecast needs for the upcoming year. Use a rolling average of previous costs as your baseline.
- Include a contingency fund of about 5% to 10% of your budget to account for inflation and unanticipated expenses. Define what expenses this fund can cover so everyone is on the same page.
4. Not Allocating Enough to Overhead
When managing their finances, many nonprofits prioritize direct program costs to appeal to funders but neglect administrative and operational needs that fall under overhead. This choice can lead organizations to underinvest in infrastructure, staff development, or technology—all of which are essential for long-term sustainability.
Underfunding overhead also risks burnout among staff, system inefficiencies, and missed opportunities for capacity-building. Without investing in internal operations, nonprofits limit their ability to scale and adapt.
How to Avoid This Mistake
- Educate donors, volunteers, board members, sponsors, and staff on the importance of overhead. Explain how strong infrastructure leads to better impact and easier mission fulfillment.
- Use data visualization to emphasize this point. Seeing how overhead costs support mission outcomes may make the connection clearer for stakeholders.
5. Neglecting to Manage Restricted Funds Properly
Restricted funds are contributions that donors or sponsors designate for specific uses. If you don’t track them properly, they can distort your financial outlook, potentially leading you to act as if your organization has more available funds than it does to cover general expenses.
Additionally, improperly managing restricted funds can result in compliance issues and breaches of donor trust. For instance, if a donor contributes to your environmental protection program, and you use their funding for health research, they may form a negative view of your organization and end their support since you didn’t respect their wishes.
How to Avoid This Mistake
- Account for restricted funds separately. Create separate categories in your chart of accounts for restricted and unrestricted funds. You may even create subcategories for permanently restricted, purpose-restricted, and time-restricted funds.
- Monitor restricted fund usage. Designate fund managers who are responsible for handling donor-restricted funds. These team members should track expenditures in real time and keep detailed transaction records, such as receipts, invoices, and proof of expenditure.
6. Overreliance on One Funding Source
Imagine a major donor contributes $100,000 to your nonprofit each year. When the annual budgeting process rolls around, you project that revenue to be $100,000.
However, three months into the year, you discover that the donor has changed their philanthropic focus and will now only contribute $20,000 to your cause. How can you make up the extra funds while providing beneficiaries with the same quality of services?
Depending heavily on a single grant, donor, or revenue stream puts your mission at risk. If that source lessens or disappears, your nonprofit may face a financial crisis and have to make sudden program cuts or layoffs that negatively impact your community.
How to Avoid This Mistake
- Diversify your revenue sources. Tap into as many revenue streams as possible, such as individual donations, in-kind contributions, grants, corporate philanthropy, membership dues, investment returns, and program fees.
- Strengthen your case for support. Leverage data that highlights mission impact and storytelling that elicits emotional connections to your cause to win over new donors, sponsors, and grantmakers.
7. Not Monitoring the Budget Regularly
Budgets shouldn’t sit untouched after board approval. Without ongoing review, organizations may miss early signs of overspending or underperformance, leading to last-minute scrambles and hard decisions.
Regular monitoring enables teams to adjust their financial management strategies in real time. Going through this process at regular intervals helps your team spot trends, identify savings opportunities, and ensure that expenditures align with organizational goals.
How to Avoid This Mistake
- Monitor your budget throughout the year. YPTC’s nonprofit budgeting guide recommends reviewing your budget monthly to catch and correct any mistakes, quarterly to assess financial performance and compare budgeted and actual revenue and expenses, and annually to analyze financial performance and budget-to-actual reporting for the year.
- Involve multiple stakeholders in the budgeting process. With more eyes on your budget, there’s less of a chance any discrepancies will fall through the cracks. While your leadership team should oversee budgeting, the finance committee should ensure it complies with accounting standards and regulatory requirements, board members should review and approve it, and an accountant should provide budget-to-actual reporting.
With careful planning, collaboration, and data-driven decision-making, your nonprofit can craft a budget that supports mission pursuit and long-term impact. If your team needs help getting there, consider partnering with a financial expert, like a nonprofit controller, to strengthen your approach and position your mission for success.
