May 11, 2026

Understanding Nonprofit Budgets

A nonprofit budget is the organization’s financial plan for the year. It lays out expected revenue, planned expenses and shows how money will be used across programs, fundraising, and administration. This helps nonprofit leadership see whether plans are financially realistic and identify areas where additional fundraising may be needed. This information can also help to uncover where financial gaps may exist. Finally, it also helps board members understand the overall financial health of the organization before making any governance decisions. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

What’s a Nonprofit Budget?

A nonprofit budget is the organization’s financial plan for a defined period, typically one fiscal year. It makes projections for both revenue and expenses and aligns them with the organization’s mission and strategic priorities. Some budgets also account for potential risks and different economic scenarios. 

The budget is primarily used for planning purposes inside the organization. However, nonprofits are encouraged to develop the budget with the Financial Accounting Standards Board (FASB) rules in mind. These rules require separating restricted from unrestricted funds, along with specific rules for reporting expenses and liquidity. The annual Form 990 uses similar classifications. When a nonprofit aligns the budget with the reporting requirements from the start, it’s easier to prepare accurate year-end reports. 

Key Components of a Nonprofit Budget

Most nonprofits have budget line items for projected revenue, expenses, and contingency funds. 

Revenue can come from several sources, and it should be categorized appropriately in the budget. Donations commonly include individual monetary gifts and in-kind contributions such as non-cash assets like stocks or even cryptocurrency. Other traditional sources include public and private grants, which are often made with restrictions. For example, a grant made for a summer youth program can’t be used to cover unrelated administrative costs. More established nonprofits may also have investments to track and record, including bonds, mutual funds, and any interest earned from endowments. 

More nonprofits are also exploring corporate philanthropy, with many businesses increasing sponsorship budgets for the year. Still others have earned income sources from membership dues, fees for certain services, or merchandise sales. Earned income also includes activities like selling advertising space in a quarterly newsletter or renting out a facility. In some cases, that type of activity may be treated as unrelated business income (UBI) and subject to tax. 

Expenses generally fall into program, fundraising, and administrative categories. Program expenses are frequently the largest share of spending because they directly support mission delivery. Fundraising costs usually include activities like marketing and event planning. Administrative costs support the indirect support needed to sustain those programs, which includes expenses like office staff, utility bills, and rent. Fundraising and administrative expenses are often referred to as indirect costs or overhead. 

However, it’s important to note that views on “overhead” costs are changing. It used to be that nonprofits were advised to keep over to less than 35% of overall spending. The idea was that very low overhead spending meant that more money could be directed to program activities. But donors are expressing more interest in impact as a measure of effectiveness. For that reason, more nonprofits are including cost-per-outcome measures to help donors understand how resources translate into results.

Nonprofit budgets should also include operating reserves or contingency funds. These are the funds set aside to support operations if revenue unexpectedly declines or funding is delayed. A liquidity policy can be used to establish a target reserve level, with most nonprofits aiming to keep at least three to six months of operating expenses in reserves.  

There’s a common misconception that nonprofits must have a balanced budget, but that’s not always the case. An organization might be planning for a surplus to build reserves, or they might temporarily operate at a deficit to invest in staffing or technology. Either way, leadership should understand the long-term goals, and those goals should be reflected in the budget. 

Best Practices

Nonprofits are going to have different processes for creating a budget, but there are a few best practices to keep in mind: 

• Be proactive. It can take several months to form a budget, and the goal is to have a budget approved by the board before the start of the fiscal year. That means gathering input from staff members early. Development can provide a conservative estimate on fundraising, and program managers can provide an idea of both direct and indirect costs. That forms the basis for revenue and expense projections, though it’s helpful to work through the numbers with an accounting professional for more accurate results. 
• Review the budget monthly or quarterly. A budget is an ongoing process that should be revisited several times throughout the year. Monthly variance reports compare budget-to-actual results and can provide a window into emerging risks or opportunities. For example, cash flow timing might be different from what the nonprofit expected. Grants may have been terminated or needs may have increased. A regular review and scenario planning gives the nonprofit a way to course correct ahead of any major funding issues. 
• Consult with advisors. The budget process is generally led by a CFO, controller, or outsourced accounting team, who works with executive leadership and the board of directors. This ensures that the budget follows accounting standards and meets strict nonprofit requirements. They may also use advanced forecasting tools to make budget projections, which gives the nonprofit a more realistic starting point for planning mission delivery.

Contact Us

A nonprofit budget should do more than track revenue and expenses. It should help leadership understand the organization’s financial position and support better decision-making going forward. If you have questions about the information outlined above or need assistance with another nonprofit audit or budgeting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.