Budget planning for nonprofits: Approaches for the next fiscal year

Budget planning is one of the most important financial responsibilities a nonprofit undertakes each year. A well constructed budget supports good stewardship, builds donor confidence, and positions the organization for sustainability. Yet many nonprofits begin the process too late, leaving little time for analysis, alignment, or meaningful board discussion.

Financial reporting may not carry out the mission directly, but it plays a central role in advancing it. Accurate, transparent financials demonstrate accountability, support funding conversations, and equip board members to clearly explain how resources are used in service of the organization’s goals.

This guide outlines a practical framework to help nonprofits plan their budget for the next fiscal year with discipline and purpose.

When Should Nonprofits Start Budget Planning?

Nonprofits should begin budget planning at least three months before fiscal year end. Starting before the current year is fully closed allows leadership to evaluate trends, identify risks, and avoid building a budget on incomplete information.

Early planning also gives finance, development, and program teams time to collaborate, resulting in a more realistic budget and more productive board conversations.

Use Historical Trends to Project Forward

A strong nonprofit budget is grounded in historical performance. Rather than relying on a single prior year, review financial trends over multiple years to project how the current year is likely to close. Compare:

• Prior year actual results to the approved budget
• Current year projections to the approved budget

This approach helps identify recurring variances, cyclical patterns, and structural issues that should be addressed in the upcoming fiscal year. If a significant change is on the horizon, such as a new grant, expanded program, capital project, or additional location, it should be clearly identified and explained as part of the materials prepared for board review.

Cash vs. Accrual Basis: Budget on the Right Accounting Basis

Nonprofits should prepare budgets using the same accounting basis used for financial reporting, typically accrual accounting under GAAP, to support meaningful budget-to-actual comparisons throughout the year.

In addition, many organizations benefit from preparing a supplemental cash flow forecast, particularly when dealing with pledges, multi year grants, or reimbursement based funding.

Example: A nonprofit may have $20 million in pledged revenue over five years, but that does not mean the cash is available in the current fiscal year. Understanding the timing of receipts is essential for operational planning and staffing decisions.

The Biggest Expense is Typically Payroll

Payroll is often the largest expense in a nonprofit budget, making it one of the most important areas to address early. Staffing decisions carry long term implications and should be evaluated alongside mission impact and financial sustainability.

Key considerations include:

• Compensation competitiveness and alignment with current market data
• Completion of a formal salary study
• Staffing levels that support programs without contributing to burnout
• Overhead levels that remain appropriate given revenue expectations

Executive compensation warrants particular attention, as it is one of the most closely scrutinized areas of IRS Form 990 compliance reporting. Organizations should prioritize clear policies for approving executive pay and be prepared to support those decisions.

Understanding the full cost of staffing by program strengthens decision making and supports clearer communication with leadership and the board.

Budget Expenses by Program, Grant, or Area

Whenever possible, expenses should be budgeted at the program, grant, or functional area level. This provides clearer insight into the cost of delivering services and helps leadership evaluate effectiveness and sustainability.

Program level budgeting also supports stronger grant reporting and helps organizations tell a more complete story about how financial resources advance mission outcomes.

Nonprofit budgets should align with how results are ultimately reported on Form 990, which is public and widely reviewed by stakeholders. Most organizations benefit from budgeting expenses using the same functional categories:

• Program services
• Management and general (M&G)
• Fundraising

Budgeting this way improves internal consistency, simplifies year end reporting, and helps board members and stakeholders better understand how resources are allocated.

Tracking the expense-to-revenue ratio, which measures efficiency by taking your total expenses and dividing by revenue, can also provide useful insight. Monitoring this metric throughout the year allows organizations to adjust spending if revenue falls short of expectations.

Coordinate Revenue Planning with Development and Program Teams

Development and program teams help leadership understand what funding is required to support program goals. Common approaches include:

• Budgeting to break even, where fundraising efforts are designed to cover planned expenses
• Budgeting for a surplus, with a clear plan for how excess funds will be used
• Budgeting for a deficit, often tied to restricted or multi year funding, with a defined strategy to manage cash flow

Regardless of the approach, the budget should clearly communicate expectations and assumptions to the board.

Prepare for Seasonality and Board Questions

Nonprofit revenue and expenses are rarely spread evenly throughout the year. Seasonal fundraising, grant timing, and program cycles can all create fluctuations that raise questions during board meetings.

To address this, organizations should:

• Review prior year monthly patterns
• Anticipate cyclical variances in the upcoming year
• Present comparative financials against both prior year and budget
• Provide a snapshot of funding sources and how funds are being used

Financial statements should tell a story that aligns with the organization’s mission, goals, and program activity.

Board Approval and Implementation

The final budget is typically presented for board approval shortly before the start of the new fiscal year. In many cases, the board votes to approve the budget largely as presented, assuming earlier discussions addressed major questions.

Best practices include:

• Finalizing the budget at least one month before fiscal year end
• Uploading the approved budget into the accounting system before the new year begins
• Running budget to actual reports early in the new fiscal year

Taking these steps enables a smoother transition out of year end close and supports more effective financial monitoring throughout the year.

Frequently Asked Questions

When should nonprofits start budgeting for the next fiscal year?

Most nonprofits benefit from starting budget planning at least three months before fiscal year end. Organizations with audits, complex grant activity, or seasonal revenue may benefit from starting even earlier.

Should nonprofit budgets follow Form 990 expense categories?

Yes. Budgeting by program services, management and general, and fundraising aligns internal reporting with Form 990 presentation and makes financial results easier to interpret for boards and stakeholders.

How should nonprofits budget for multi year grants or pledges?

Multi year funding should be budgeted based on when revenue is recognized and cash is received, not the total award amount. A supplemental cash flow forecast can help manage timing differences.

Why do nonprofit budgets often differ from monthly results?

Many nonprofits experience seasonal revenue and expense patterns tied to fundraising cycles, grants, and program delivery. Reviewing prior year trends and documenting assumptions helps explain expected variances to the board.

We Can Help

A thoughtful budget demonstrates accountability, transparency, and commitment to sustainability. For donors, grantors, and board members, it signals disciplined stewardship in support of the mission.

The Elliott Davis team provides support ranging from bookkeeping to fractional CFO services. With the right timeline, structure, and collaboration, budget planning can become a strategic tool rather than a year end scramble.

Contact our team to streamline budgeting and prepare for the next fiscal year with confidence.

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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.