External Budgets

By | October 9, 2017

Budgets tell a story

Budgets are important. Your budget tells the story of your ministry or program by showing potential donors how their money will be used. When you’re asking for gifts under a $1,000, it’s unlikely that your donor is going to ask for your budget. If you’re requesting for a grant or major gift, you better have that budget ready.

It’s typically good to have a different version of your budget to give your donors than you use for operating your ministry. This is called an ‘external budget’.

IMPORTANT CLARIFICATION! The numbers on your internal and external budgets MUST MATCH! You are not to ‘cook the books’ for your donors EVER. This would at least be a form of deception, and at most an illegal fraud that could land you in jail.

What the external budget does is groups categories of expenses from your internal budget so you can present a more easily understood version to your donors. For instance, your line item budget (the one you use internally for fiscal control) might have separate general ledger lines for sanitation, utilities, building and site maintenance, and pest control. Your external budget would lump them all together in one category called ‘occupancy costs’.

You should create you external budget in such a way that you can get more specific if the donor asks. Remember, this is not about concealment, it’s about clarity. Your organization should strive for transparency as a part of stewarding donations.

External Budget

Below is a sample external budget. It has less than 1/4 of the number of the categories than the actual budget, but there is a one-to-one correspondence between the two. You’ll notice under the expenses that each category is further broken down into ‘program,’ ‘management’, and ‘fundraising’ subtotals. These are the categories that are required on the Tax Form 990 for non-profits, and it also gives your potential donor an immediate sense of how much of your funding goes towards those three cost buckets. Most donors want to see much more of their donation go towards programs than management or fundraising.

Program Budget

Below is a sample program budget. You’ll notice that it is a little bit different from your overall organization budget. It does not include a comprehensive explanation of revenue for instance. This program budget is supposed to provide a clear picture of the cost to run a particular program. Notice that there is a line for volunteer time. Volunteer hours have a real value that can you should include when you’re budgeting your program.

Direct costs are those costs that necessary for running the program. Indirect costs, on the other hand, are a percentage of the overhead costs like management and fundraising. Funders typically want to see that the direct costs are substantially higher than the indirect costs. If indirect costs eat up too much money, the program looks inefficient. You can calculate the indirect costs of your program by estimating what percentage of your organization’s efforts are devoted to a particular program. So for instance, a program that takes up 50% of your organization’s efforts would have indirect costs equal to 50% of your management and fundraising costs.  An important side note… you do not have to include indirect costs in your program budget, but then you’ll need to make sure that no indirect costs are paid with funds that are given in response.

Budget Calculator

I have included a sample budget calculator in Excel for you to use. If you don’t know how to use Excel, I recommend that you learn to love it. It’s a great tool. This calculator is based on the one that I use for grants, and is the best one page budget summary format that I’ve found so far. The calculator has three tabs. The first tab is the one that you use to input all of your budget line items and adjust how you group categories of revenue and expense together. The second tab links to the first tab and puts the information into a presentable format. The third tab is the sample program budget.

External Budget Sample

(This link opens up an excel spreadsheet that you can use. Feel free to use it with my blessings.)