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Learn how to create accurate, up-to-date budgets in order to maintain control over finances and show funders exactly how your money is being used.


  • What are the elements of an annual budget?

  • Why should you prepare an annual budget?

  • Some practical considerations

  • Planning and gathering information to create a budget

  • Putting it all together: Creating and working with a budget document


Download the Program Based Budget Template mentioned in this video here.


What are the elements of an annual budget?

It can be daunting to start the process of creating a budget, especially if you're not familiar with some of the common accounting and budget terminology you will encounter, so we have provided a glossary of terms covered here, located toward the bottom of the page under the In Summary section of the page.

It is important for organizations to create accurate and up-to-date annual budgets in order to maintain control over their finances, and to show funders exactly how their money is being used. How specific and complex the actual budget document needs to be depends on how large the budget is, how many funders you have and what their requirements are, how many different programs or activities you're using the money for, etc. At some level, however, your budget will need to include the following:

  • Projected expenses. The amount of money you expect to spend in the coming fiscal year, broken down into the categories you expect to spend it in - salaries, office expenses, etc.

Fiscal year simply means "financial year," and is the calendar you use to figure your yearly budget, and which determines when you file tax forms, get audited, and close your books. There are many different fiscal years you can use. Businesses often use the calendar year -- January 1 to December 31. The federal government's fiscal year runs from October 1 to September 30. State governments -- and therefore state agencies and many community-based and non-profit organizations that receive state funding - usually use July 1 to June 30. Most organizations adopt a fiscal year that fits with that of their major funders. You'll want to prepare your budget specifically to cover your fiscal year, and to have it ready before the fiscal year begins. In many organizations, the Board of Directors needs to approve a budget before the beginning of the fiscal year in order for the organization to operate.

  • Projected income. The amount of money you expect to take in for the coming fiscal year, broken down by sources -- i.e. the amount you expect from each funding source, including not only grants and contracts, but also your own fundraising efforts, memberships, and sales of goods or services.
  • The interaction of expenses and income. What gets funded from which sources? In many cases, this is a condition of the funding: a funder agrees to provide money for a specific position, for instance, or for particular activities or items. If funding comes with restrictions, it's important to build those restrictions into your budget, so that you can make sure to spend the money as you've told the funder you would.
  • Adjustments to reflect reality as the year goes on. Your budget will likely begin with estimates, and as the year progresses, those estimates need to be adjusted to be as accurate as possible to keep track of what's really happening.

Why should you prepare an annual budget?

  • It sharpens your understanding of your goals
  • It gives you the real picture - by accurately showing you what you can afford and where the gaps in funding are, your budget allows you to plan beforehand to meet needs, and to decide what you're actually able to do in a given year
  • It encourages effective ways of dealing with money issues - by showing you what you can't afford with known income, a budget can motivate you to be creative - and successful - in seeking out other sources of funding
  • It fills the need for required information - the completed budget is a necessary element of funding proposals and reports to funders and the community
  • It facilitates discussion of the financial realities of the organization
  • It helps you avoid surprises and maintain fiscal control

Some practical considerations

It's important to note that not everyone has the skills or desire to create and manage a budget single handed. Fortunately, there's help available, both within the organization (by hiring a bookkeeper, accountant, or CFO) and elsewhere. There are organizations like SCORE (Service Corps of Retired Executives) that exist to assist with things like budgeting. Local universities or government agencies may maintain offices that help small businesses and non-profits with financial planning. The possibility of an accounting or similar position shared with or loaned by another organization may also exist.

Planning and gathering information to create a budget

The preliminaries: What will you need to spend money on next fiscal year?

It is important to know what the priorities are and what makes the most sense for the organization at its particular stage of development. Actually figuring out what you should be spending your money on involves an organization-wide planning process.

Consider these questions:

  • What are the activities or programs that will do the most to advance your cause and mission, and that you think you can carry out with the income and resources you know you have or can foresee?
  • How many staff positions will it take to run those activities or programs well?
  • How much, how (hourly wages, salary, consultant fees, benefits), and from what sources will those staff members be compensated?
  • What else will be needed to run the organization and its activities -- space, supplies, equipment, phone and utilities, insurance, transportation, etc.?

Estimating expenses: What will it all cost?

Step 1: Develop ways of estimating your expenses

Estimate your expenses for the coming fiscal year. In some cases -- yearly rent, or salaries, for instance -- you'll probably have real figures for what these expenses will be. In other cases -- telephone and utilities, etc. -- you'll have to estimate of an average monthly cost.

Be sure to add in some money in a "miscellaneous" category, in order to be prepared for the unexpected. There are always expenses you don't anticipate, and it is part of conservative estimation to make allowances for them.

Conservative estimation: When preparing a budget, try to be as accurate as possible. Always use actual figures if you have them, and when you don't, estimate conservatively for both expenses and income.

When you estimate expenses, guess high -- take your highest monthly phone bill and multiply by 12, for instance, rather than taking an average. By the same token, when you're estimating income, guess low -- the smallest number realistically possible. Estimating conservatively when you plan your budget will make it more likely that you stay within it over the course of the year.

Step 2: List the estimated yearly expense totals of the absolute necessities of the organization

For most organizations, they include, but aren't necessarily limited to:

  • Salaries or wages for all employees, listed separately by position
  • Fringe benefits for all employees, also broken out by position. Remember that even if you have no formal fringe benefits, you still have to pay part of the Social Security and Medicare taxes, as well as Workers' Compensation and Unemployment Insurance, for any regular employees (people who work a fixed schedule). These costs can be considerable, amounting to 12 to 15% added on to your total payroll.
  • Rent and/or mortgage payments for the organization's space
  • Utilities (heat, electricity, gas, water)
  • Phone service
  • Internet provider or server costs, depending on your organization's needs
  • Insurance (liability, fire and theft, etc.)

Step 3: List the estimated expenses for things you'll need to actually conduct the activities of the organization

  • Program and office supplies: pencils, paper, software, educational material, post-it-notes, etc.
  • Program and office equipment. Wherever you classify computers and peripherals, copiers, faxes, etc., be sure to figure in the annual estimated costs of repairs or service contracts in addition to purchase or lease costs.

For budgeting purposes, it may be useful to separate program supplies and equipment from office supplies and equipment. In the case of state and federal funding, at least some office expenses are often considered "administrative", and funding for administrative expenses may be limited, sometimes to as little as 5% of your budget.

Step 4: List estimated expenses for anything else the organization is obligated to pay or can't do without

  • Loan payments
  • Consultant services - these may include an annual audit, accounting or bookkeeping services, payments to other organizations for specific services, etc.

Most non-profit organizations are required, either by funders or by the IRS, to undergo an audit every year. This means that a CPA (Certified Public Accountant) must check the organization's financial records to make sure they are accurate, and work with the organization to correct any errors or solve problems. If there is nothing illegal or seriously wrong, the CPA then prepares financial statements using the organization's books, and certifies that the organization follows acceptable accounting practices and that its financial records are in order. The larger an organization's budget, the more complicated an audit is likely to be, the more time it is likely to take, and the more it is likely to cost. An audit of a $100,000 budget might cost $2,000 to $4,000, for instance; that of a $1 million budget might cost $15,000.

  • Printing and copying, if not done within the organization
  • Transportation: travel expense for staff, participants, and/or volunteers; and vehicle upkeep and expenses for any organization-owned vehicles
  • Postage and other mailing expenses

Now that you've gathered your necessary expenses, you can take a look at your wish list.

Step 5: List estimated expenses for things which you aren't sure you can afford, but would like to do

These might include staff positions, new programs (including staff, supplies, space), equipment, etc.

Step 6: Add up all the expense items you have listed

This total is what you would like to spend to run your organization. In other words, it's your projected expense for the coming fiscal year.

Estimating Income: Where are we going to get all that money?

Use last year's figures, if you have them, as a baseline and estimate conservatively, rather than being overly optimistic, and laying yourself open to disappointment and worse.

Step 1: List all actual figures or estimates for what you can expect from your known funding  sources

This includes sources that have already promised you money for  the coming year, or that have regularly funded you in the past. These may include federal, state or local government agencies; private and community foundations; United Way; religious organizations; corporations or other private entities.

Step 2: If your organization fundraising, estimate the amount you'll raise in the next fiscal year

Fundraising efforts might include community events (a raffle, a bowl-a-thon), more ambitious events (a benefit concert by a world-class performer), media advertising, or phone or mail solicitation.

Step 3: If you charge fees or sell services, estimate the amount you'll take in from these activities

This could be consulting services your organization offers, training materials that you created that can be sold to others interested in the same work, etc.

Step 4: If you solicit members who pay yearly dues or fees, estimate the amount that membership will yield

Step 5: If you sell items, estimate what these sales will bring in

This could include pins, T-shirts, books, blood pressure cuffs, etc.

Step 6: If you sublet or rent space to others, record the estimate of what this will bring in

Step 7: If you have any income from investments, estimate what you'll realize from these

This could include investments, endowment income, annuities, or interest income (e.g., from a certificate of deposit, or from a Money Market or checking account)

Step 8: List and estimate the amounts from any other sources that are expected to bring in some income in the coming fiscal year

Step 9: Add up all the income items you have listed

This total is the money you have to work with, your projected income for the next fiscal year.

Putting it all together: Creating and working with a budget document

Analyzing and adjusting the budget

Step 1: Lay out your figures in a useful format

If your budget is going to be useful, it has to be organized in such a way that it can tell you exactly how much you have available to spend in each expense category.

The easiest way to do this is by using a grid, usually called a spreadsheet. In its simplest terms, a spreadsheet will have a list of funding sources along its top edge and a list of expense categories running down its left-hand edge, so that each vertical column represents a funding source, and each horizontal row represents an expense category. Where each column and row meet (this meeting place is called a cell), there should be a number representing the amount of money from that particular funding source (the column) that goes to that particular expense category (the row). A simple spreadsheet for a small organization might look like this:

Spreadsheet: United Consolidated Metropolitan Health Agency (UCMHA)

  Dept of Public Health United Way Membership Dept of Welfare Totals
Salaries 15,000 2,500 2,500 21,000 41,000
Fringe 3,000 500 500 4,200 8,200
Supplies 300 200 0 500 1,000
Equipment 1,500 1,500 0 0 3,000
Phone 400 150 0 600 1,150
Utilities 500 200 0 500 1,200
Insurance 800 200 0 400 1,400
Rent 4,000 500 0 3,000 7,500
Totals 25,500 5,750 3,000 30,200 64,450

A spreadsheet format allows you to assign restricted funds to the proper categories, so that you can see how much money is actually available to you for any given expense category. In the above example, if the Department of Public Health says that no more than $18,000 of its grant can be spent on salaries and fringe, for instance, then you know that you have to find the rest of the $49,200 total in those categories from other sources.

Step 2: Compare your total expenses to your total income

  • If your projected expenses and income are approximately equal then your budget is balanced.
  • If your projected expenses are significantly less than your projected income, you have a budget surplus. This circumstance leaves you with the possibility of expanding or improving the organization, or of putting money away for when you need it.
  • If your projected expenses are significantly greater than your projected income, you have a budget deficit. In this case, you'll either have to find more money or cut expenses in order to run your organization in the coming year.

Step 3: (For balanced budgets) Make sure you are able to use your money as planned

If you've filled in the numbers in accordance with your funding restrictions, your spreadsheet should immediately let you know whether you have enough in each of your expense categories. If there is a problem, there are several ways of addressing it.

  • It may be possible to come to an arrangement with the funder that allows you to use the money in the ways that you'd like to, or that allows you more freedom
  • You may be able to reassign some expenses from one category to another. If you don't have enough money to pay an Assistant Director, for example, it may make sense to make her the coordinator of a particular program, and to pay part of her salary out of the funds allotted to that program.
  • In some cases, it might be necessary to rethink your priorities a bit, so that the money can be spent in accordance with funding restrictions

It's important to remember, however, that the mission, philosophy, and goals of your organization should drive its funding, and not the other way around. Creating a program simply to make use of available funding is usually a bad idea, unless the program is one you've already planned for, and will clearly fit in with and advance the mission of your organization.

Step 4: (For budget surpluses) Be aware that it may not show up as cash until the end of the coming fiscal year

  • The most conservative course is to try to stick to your budget, and invest the excess money at the end of the year. This will give you something to draw on in emergencies, or money you can use in the future for something that the organization really wants or needs to do.
  • "Invest" here doesn't necessarily mean putting money in the stock market, which usually doesn't make sense unless you have a lot of money, and you're willing to stay with it for a long period of time - ten years or more. Certificates of Deposit, which give high interest rates in return for keeping money in the bank for a set period (generally, you can choose a period of from six months to five years), or Money Market accounts, which give a high interest rate in return for keeping a large balance, are easy ways for an organization to earn interest on its money, while still keeping it available for emergencies.
  • You can use your surplus to improve working conditions within the organization: raise salaries, add a benefit package, etc. It is important to remember that once you've instituted this type of change, you're obligated to maintain it.
  • You can buy items that you haven't been able to afford previously
  • You can consider adding positions or starting a whole new program or initiative, perhaps one you've been planning for a long time. If you're starting a new program, you're also implicitly making a commitment to maintaining it for a period of years, so that it will have enough time to be successful.
  • You can think about a long-term capital investment, like buying a building. You could lock in your rent for the duration of the mortgage (probably 20 years), and you might be able to provide the organization with income as well, by renting part of the building to other organizations.
  • Your surplus may not be large enough to enable your organization to make significant changes on its own, but it may provide the means for you to enter into a collaboration with other organizations to achieve a goal that none could have accomplished alone.

Step 5: (For budget deficits) Consider combining several or all of the following possibilities to make your budget work

  • If you have enough money in the bank or in investments from prior years, you can use it to make up the gap in your budget
  • You can try to raise the additional money you need through grantwriting, fundraising efforts and events, increasing your fees for service, etc. If you have a plan for raising money - such as a raffle to finance a new copier - it should be listed with your estimated income. But be aware that such a projection isn't "real" money until the financial goal it represents is actually reached.
  • You can explore saving some money by collaborating with another organization to share the costs of services, personnel, or materials and equipment
  • You can try to cut expenses by reducing some of your costs: use less electricity, use recycled paper, try to get donations of some items you planned to buy, etc.
  • You can cut expenses by eliminating some things from your budget

A Guide for Budget Cutting

If you're going to cut your budget, it's a good idea to have a rational system for doing so. Here is a suggested step-by-step process which allows you to look at what is more and less necessary, and to make considered decisions about what you can do without and what you can't.

  • Look first at those items that aren't essential to the running of the organization.
  • Can you cut or cut down the amount of physical, tangible items you need to run the program, or cut the cost of services in some way?
  • Finally, if nothing else will serve to balance the budget, you may have to consider cutting back on whatever it is the organization does, which usually translates to dealing with the positions of paid staff.
    • Reduce the hours of one or more staff, if people are on hourly wages - for instance, consider reducing the work week from 40 to 37.5 hours, or even further
    • Reduce one or more positions from full to half time - keep in mind that in many organizations, this reduction would eliminate benefits for those affected
    • Ask staff to pay a larger share of their fringe benefits (if there are fringe benefits)
    • Lay off one or more staff members

You can borrow the money you need, being sure to add the loan payments to your projected expenses and figure them into your revised budget

Creating an actual budget document

While the spreadsheet is probably what you'll use to keep track of your finances, you might also want to put the budget in a form everyone in the organization can understand.

Probably the simplest budget document is one which lists projected expenses by category and projected income by source, with totals for each. Thus, anyone can see how much you intend to spend, how much you intend to take in, and what the difference is, if any. Referring back to the spreadsheet example above, a simple budget would look like this:

UCMHA Annual Budget for Fiscal 2001 (July 1, 2000 to June 30, 2001)

Expenses: Estimated Dollar Amount:
Salaries 41,000
Fringe 8,200
Supplies 1,000
Equipment 3,000
Phone 1,150
Utilities 1,200
Insurance 1,400
Rent 7,500
Total Expenses 64,450
Department of Public Health 25,500
United Way 5,750
Membership 3,000
Department of Welfare 30,200
Total Income 64,450

Another possible form would be similar, but would include a budget narrative, explaining how various items were arrived at.

The salary item, for instance, might look like this:


Director ($17.00/hr for 20 hrs / week, for 52 weeks)


Health Educator ($14.95/hr for 30 hrs / week, for 52 weeks)

Total Salaries $41,002

Other categories would be handled in the same way, with explanations of what they included and how the money would be spent.

A final possibility would be to use the spreadsheet itself as a budget document, for those who wanted to see exactly how the money was to be allocated. Many organizations provide their Boards with both a simple budget and a spreadsheet, so that those Board members who are eager to understand the organization's finances can get a clear picture, while others can simply see whether the budget is in balance.

Working with your budget

Most organizations make sure to review their budgets on a regular schedule - once a month is usually reasonable - and revise them to keep them accurate. If you get a grant you didn't anticipate, or if your spending estimates are off, these things should be figured into the budget.

The budget becomes the basis for financial documents that you might prepare during the course of the year (balance sheets, for instance) which give an up-to-the-minute picture of the financial status of the organization.

Your budget should:

  • Tell you if there are still any gaps in funding, and exactly where they are
  • Show you exactly what you need to do to close those gaps
  • Make it possible to keep careful track of your money, to adjust to changes, and not to overspend

In Summary

Devising a budget process that examines the organization's priorities, and using it to produce an accurate, balanced budget for the coming fiscal year will help you keep control of the organization's finances, and will help guide the work of the organization. A rational and accurate budget will allow you to give accurate reports to funders and to spend their money as you have promised. And it will give you clear guidelines about what you can spend and when.


This glossary covers some of the basic accounting terminology used in the section.

Accounting: The method by which one keeps track of and manages money. There are various accounting systems that an organization can use, but the goals of all of them are to assure accurate records, and to give the organization the ability to know exactly how its money is being spent and how its financial position compares to its budget at any given moment.

Audit: A CPA (Certified Public Accountant) checks the organization's financial records to make sure they are accurate, and works with the organization to correct any errors or solve problems. The CPA then prepares financial statements using the organization's books, and either certifies that the organization follows acceptable accounting practices and that its financial records are in order, or explains any problems with the financial records and suggests corrective measures.

Balanced Budget: Projected expenses and projected income are approximately equal.

Budget Deficit: Projected expenses are significantly greater than projected income.

Budget Surplus: Projected income is significantly greater than projected expenses.

Conservative Estimation: Using the highest reasonable figures when estimating expenses and the lowest reasonable figures when estimating income, so you will be more likely to create a budget that will keep you from overspending.

CPA: Certified Public Accountant. A certified audit, which is what most funders require, must be conducted by a CPA.

Fiscal Year: This term means financial year, and is the calendar which you use to figure your yearly budget (July 1 to June 30, for example) and which determines when you file tax forms, get audited, and close your books.

Fund Accounting: The practice of keeping a separate record of the expenditures for each separate grant or contract administered by an organization. Thus, a grass roots AIDS prevention initiative might keep separate records for funds they receive from the Department of Health, the Department of Social Services, the Department of Welfare, a local community foundation, and the AIDS Action Committee.

Line-Item: An expense category (salaries, telephone, office supplies).

Line-Item Budget: Generally, a budget agreed upon with a funder that specifies how much of the funder's money will be spent on each line-item. It could also refer to any budget that is broken out by line-item.

Projected expenses: The amount of money you expect to spend in the coming fiscal year, broken down into the categories you expect to spend it in -- salaries, office expenses, etc.

Projected income: The amount of money you know or can reasonably expect to take in for the coming fiscal year, broken down by sources -- i.e. the amount you expect from each funding source, including not only grants and contracts, but also your own fundraising efforts, memberships, interest and investment income, and sales of or fees for goods or services.

Spreadsheet: A grid format for setting out a budget in order to see expenses, income, and the ways they interact all in one place. In a budget spreadsheet, each vertical column represents a funding source, and each horizontal row represents an expense category. In the space where a column and row meet (called a cell) a number represents the amount of money from that column's funding source spent on that row's expense category.

Phil Rabinowitz

Online Resources

Alliance for Nonprofit Management is reasonably useful, and has a section which gives the answers to many frequently asked questions (FAQs) about non-profit finances.

Idealist links to services, resources, etc. for non-profits. Lots of good stuff here on budgeting and other issues.

Management Assistance Program for Non-Profits provides some useful books and resources.

The Non-Profit Genie links to resources for non-profits -- a good site, although not always easy to navigate.

Non-Profit Resource Center provides links to resources for non-profits. provides best-practice guidance and hands-on tools to help you understand and manage your non-profit’s financial health. The site offers helpful resources in the areas of financial planning, operations, monitoring, and governance.