Often, we refer to the size of a nonprofit organization by the total expenses within its annual operating budget. This emphasizes the important role of expenses in the budget while also serving as a measure of an organization’s capacity to provide programs and services. To get the best possible budget for expenses, nonprofits should use a functional (programmatic) approach that better displays the cost of programs, activities, and operations and encourages staff ownership and accountability.

When preparing a nonprofit organization expense budget, I generally favor using a programs and operations approach rather than an expense by line-item method. The one exception is budgeting for staff costs (salaries, employee benefits, and payroll taxes), which is usually the largest expense line-item in a nonprofit’s budget. Preparing a separate labor budget at the front end of the budget building process will enhance planning and improve management of the organization’s workforce.

Assembling a budget for a nonprofit organization often feels like an endeavor that requires more artistic methods than scientific computations. This is especially true when it comes to budgeting for revenue and support, which is usually hard to predict with accuracy. To help balance the art (intuition) with the science (analysis) of budget building, consider using a “funding-first” approach.