How to Build an Accurate Nonprofit Operating Budget

Last year ended with more questions than answers for many nonprofit leaders. Demand for services continued climbing while costs rose faster than revenue. Staff positions stayed vacant. Programs ran on tighter margins. If this sounds familiar, you’re part of a national trend. According to the Nonprofit Finance Fund’s 2025 State of the Sector Survey, 36% of nonprofits ended 2024 with an operating deficit, marking the highest rate in a decade.

These financial pressures make accurate budget planning more important than ever. When you’re working with limited cash reserves and facing uncertain funding streams, your operating budget becomes the tool that helps you make informed decisions about where to allocate resources.

Start With What You Know

Building a working budget starts with understanding your current financial position. Review your past year’s actual income and expenses by category. Look at your major revenue sources and note any patterns in timing or reliability.

Many organizations see individual giving spike in November and December,, while grant payments often arrive in irregular chunks throughout the year. Document these trends because they’ll shape how you plan for the months ahead.

Organize Your Expenses Properly

Your expense side needs just as much attention. Break down your spending into program costs, administrative overhead and fundraising expenses. This classification matters for more than internal planning. Funders want to see how their dollars translate into mission impact, and proper categorization helps you tell that story accurately.

The Financial Accounting Standards Board requires nonprofits to track net assets with donor restrictions separately from unrestricted funds. Build this distinction into your budget from the start so you’re not scrambling to sort it out later.

Project Revenue Realistically

Revenue forecasting requires an honest view of each funding stream. Start with your most predictable sources like recurring grants or membership fees. Then add projected individual donations based on past performance and any planned campaigns.

If you receive government funding, factor in potential delays or changes. The NFF survey found that 84% of nonprofits with government support expected cuts to that funding in 2025. When a revenue source feels uncertain, consider building multiple scenarios so you can adjust quickly if circumstances change.

Build Out Your Expense Plan

Begin with your fixed costs like rent, insurance and core staffing. Add variable costs tied to program delivery, remembering that these may need to flex based on actual revenue.

Many nonprofits struggle with staffing costs because competitive salaries remain difficult to offer. The same NFF data showed that only 41% of surveyed organizations could pay all full-time staff a living wage. When you’re projecting personnel expenses, be honest about what you can sustain and where compensation gaps might affect retention.

Watch Your Cash Flow

Cash flow planning deserves its own attention within your budget process. Even if your annual revenue matches or exceeds expenses on paper, timing mismatches can create problems.

If your biggest fundraising push happens in December but your program costs peak in spring and summer, you need reserves to bridge that gap. Track when money actually moves in and out of your accounts, not just when you recognize revenue or commit to expenses.

Plan for Reserves

Some organizations resist budgeting for reserves because they worry donors will question why money sits in the bank instead of going directly to programs. The reality is that financial stability strengthens your capacity to deliver consistent services over time.

Reserve building should appear as a line item in your budget when possible. Having several months of operating expenses set aside protects you when unexpected costs arise or when a major funder decides to shift priorities.

Keep Your Budget Active

A budget isn’t a document you file away in January. and pull out again in December during audit prep. It functions as a working tool that should inform decisions throughout the year.

That means your budget needs regular review after you create it. Set monthly check-ins to compare actual results against projections. When variances appear, investigate the causes and adjust your spending plans if needed.

Involve Your Board

When board members understand how you built the budget, they can help identify potential risks or opportunities you might have missed. They also become better advocates for your organization when they grasp the financial realities you’re managing.

Walk board members through your assumptions about revenue and expenses. Explain the reasoning behind major line items. Board involvement in the budgeting process builds shared ownership of financial outcomes.

Use Technology Wisely

Basic accounting software helps you track actuals against budget throughout the year. More sophisticated tools can run scenario planning or generate reports formatted for different audiences. The key is choosing systems that match your organization’s size and complexity without creating unnecessary administrative burden.

Your Next Steps

A well-constructed operating budget gives you confidence in your decision-making and provides clear communication tools for stakeholders who care about your mission. When funding gets tight or unexpected opportunities arise, you’ll know exactly what resources you have available and what trade-offs you might need to consider.

If your organization needs help building a budget that reflects both financial reality and mission priorities, contact a James Moore professional. Our accounting and controllership team works with nonprofits to create budgets that support sustainable operations while maintaining compliance with regulatory requirements.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.