Your annual budget: building it, getting it approved and using it

This guide is for the treasurer or director who has to put together next year's budget, often for the first time and often in a spreadsheet inherited from someone else. A budget is your plan, in numbers, for the money you expect to raise and spend in the coming year. After reading, you'll know how to build one from this year's actual figures, how to split costs into programs, management and fundraising the way the IRS does, how to present it so the board can approve it, and how to use it all year.

If you're a new charity planning your very first year, start with our first-year budget template. If you need a budget for one grant application, see writing a grant budget.

Why the board needs a budget

A budget isn't just paperwork. It's how the board decides what the charity will do next year, and how it checks during the year that things are on track. The New York Attorney General's guidance on internal controls says a charity's written financial procedures should include "preparing an annual income and expense budget and periodic reports - at least quarterly, preferably monthly - comparing actual receipts and expenditures to the budget with timely explanations of variances."

In plain words: make a budget, approve it, and compare what actually happens with it at least every quarter.

When to start

Start two or three months before your fiscal year begins, so the board can approve the budget before the year starts. If your year runs January to December, begin in October. Our guide to the fiscal year and accounting basis explains how your year is set.

Step 1: Start from real numbers

Don't start from last year's budget. Start from what actually happened.

1. Pull this year's actual income and expenses so far, by month, from your accounting records or bank statements.
2. Estimate the rest of the year. Add the months still to come, using what you know (a grant payment due in November, the year-end appeal).
3. Note anything unusual that won't repeat: a one-time grant, a big repair, an event that was cancelled.

That gives you this year's likely totals: the base for next year.

Step 2: Estimate income, carefully

Be realistic about money coming in. It's the part most budgets get wrong.

• List each source: individual gifts, events, foundation grants, government grants, earned income, interest.
• Sort by certainty. Money already promised in writing is firm. Renewals from long-time funders are likely. New grants you plan to apply for are hopeful.
• Count hopeful money carefully. Include only part of it, or leave it out and list it separately as "if funded."
• Separate restricted money. Gifts and grants for a specific purpose can only pay for that purpose. Our restricted funds guide explains how to track them.

Step 3: Estimate expenses

• Start with fixed costs you'll pay no matter what: rent, insurance, salaries, software, accounting.
• Add program costs: the supplies, travel and staff time each program needs.
• Include the costs people forget: payroll taxes, the annual audit or review, state registration fees, bank and card-processing fees, equipment that will need replacing.
• Plan for a cushion. A small contingency line, or a planned contribution to your reserve, protects you from surprises. Our guide to reading financial statements explains operating reserves.

Step 4: Split costs by function

If your charity files the full Form 990, the IRS asks you to report expenses in three functional columns, and 501(c)(3) and 501(c)(4) organizations must complete all of them. Budgeting the same way now makes the 990 much easier later, and many funders ask for these numbers too. The Form 990 instructions describe the columns:

Some costs belong to more than one column, like a director who runs programs and raises money, or rent for an office used for both. The instructions say that if your accounting system doesn't allocate expenses, you "can use any reasonable method of allocation," but you must document the method. A simple approach is to estimate the share of time or space each function uses, write the percentages down, and use them all year.

Step 5: Balance it, or explain why not

Compare total income with total expenses.

• A surplus (more in than out) can go to your reserve or to next year's priorities.
• A deficit (more out than in) needs a plan: cutting costs, raising more, or spending reserves on purpose for a stated reason, such as starting a new program.

Never approve a deficit by accident. If the board chooses to spend reserves, say so in the budget and in the minutes.

Step 6: Present it to the board

Send the draft at least a week before the meeting. Keep it to one or two pages, with:

• a summary: total income, total expenses, the surplus or deficit;
• last year's actuals and this year's estimate beside next year's budget, so the board can see the trend;
• short notes on big changes: a new grant, a new staff position, a program ending;
• your assumptions: which income is firm and which is hopeful.

The board then discusses, asks questions, and approves the budget by a vote recorded in the minutes. Our board meeting agenda template and board minutes template can help.

Step 7: Use it all year

A budget that sits in a drawer doesn't protect anyone.

• Compare actuals with the budget every month if you can, and at least every quarter.
• Explain big differences in a sentence or two: "Event income is $3,000 under budget because we moved the gala to spring."
• Revise if things change a lot, such as losing a major grant. The board approves the revised budget the same way.

Our treasurer's report template shows a simple monthly format, and our financial controls guide explains the monthly board report.

Your budget checklist

• We started from this year's actual income and expenses, not last year's budget
• Income is sorted into firm, likely and hopeful, and hopeful income is counted carefully
• Restricted income is shown separately from unrestricted income
• Expenses include payroll taxes, audit or review, fees and replacements
• Costs are split into programs, management and fundraising, with our method written down
• Any deficit is deliberate and explained
• The board approved the budget by a recorded vote before the year began
• We compare actuals with the budget at least every quarter and explain big differences