CFG Classroom
III. How to Draft a Proposal Budget
This class provides basic information to assist you in developing your proposal budget. The course covers issues such as overhead and administrative costs, employee fringe benefits, and fixed costs.
This class will provide you with the knowledge necessary to develop a project budget. If you are a beginner, you may benefit from first taking the Proposal Writing Course.
Upon completion of this course, you should know:
- The standard parts of a project budget
- Which financial documents are often required
- How to incorporate overhead costs and fringe benefits into the budget
Project Budget
The project budget is an integral, and often complex, part of the proposal. It may come as a surprise that some grantmakers will not read your proposal straight through. Rather, they will skip to a specific section. That section is often the budget.
As its name implies, a project budget is a financial estimate for a project which requires funding. This document consists of two broad categories: anticipated expenses and earned income you expect to generate. A complete, easily understood budget greatly enhances a proposal. The budget content and format is often dependent of the grantmaker's guidelines.
Unless your organization has an in-house accountant, you may wonder who is qualified to prepare the project budget. Consider the following factors in selecting the budget preparer:
- How well does the person understand the project?
- Is the individual financially astute?
- Is the person knowledgeable of the organization?
In some cases, the budget may best be done as a joint project. Perhaps the organization's financial expert knows very little about the project. She can help the project director, who may have little knowledge of finance, but a thorough understanding of the project. It is always wise to have another individual carefully read the budget before submission.
For all but the simplest budgets, it is prudent to prepare an expense worksheet prior to beginning your budget. Brainstorm all conceivable expenses you will incur if the project is executed. Then divide these expenses into two categories: personnel and non-personnel. Personnel expenses include people costs, including employees, consultants, and independent contractors. Non-personnel expenses include goods and services (where you are paying for something to be done, rather than employing a person to do something).
Be specific for each item. What is it? What is the cost? Summarize how you arrived at each number. If you use an "Other" category, keep the amount small, or provide an explanation. For example: the airfare to China, referenced above, may be significantly higher by May. Be sure to keep detailed records of how you arrived at your numbers. These provide essential reminders when you are writing the proposal or discussing it with funders.
If your project has already received support (or support pledges) from other sources, this information should be revealed in a support and revenue statement. The amount of support already received should then be deducted from the total expenses. Any anticipated revenue from the project should be deducted as well. The remaining amount should be the maximum amount requested of the grantmaker.
If you submit multiple proposals synonymously, it is wise to indicate this in your proposal. For example, you can state, "In addition to your foundation, this proposal is being submitted to Foundation A and Foundation D" or "We have already received a grant of $12,000 from Foundation A, and are requesting the remainder from you."
Overhead Costs
Some grantmakers ask that overhead expenses be included in the project budget. These expenses, or indirect costs, are the fixed administrative costs of an organization's daily operation. Examples include utilities, rent, and sometimes depreciation. Thus, an organization that rents a building for $1,000/month, and plans to use 50% of the building for a 6 month project, may include a rent expense of $3,000. A formula, based on a ratio of the organization's overhead costs to its total program expenses, is generally used to estimate overhead costs.
Example: Each year Charity A, a nonprofit organization, spends $500,000 on its programs, and incurs $100,000 in overhead costs.
What is the overhead rate? $100,000 / $500.000 = .20
The overhead rate is 20%, which means that for every dollar the organization spends on its programs, 20 cents is expended for overhead.
This calculation is then used to estimate the overhead for a particular project. If a project is $1,000 (without overhead costs), then the overhead costs estimate is $200. It is critical to check the grantmaker's guidelines for information on overhead expenses, because preferences vary widely.
Employee Benefits (Including Payroll Taxes)
Employee benefits and payroll taxes must be included as part of personnel costs. Thus, if an employee will spend 30% of his time on the project, 30% of his payroll taxes and benefits must be included in the personnel section of the budget. This includes social security and medicare taxes paid by the organization, health insurance, and disability insurance. To simplify things, you may determine the organization's total cost (in this category), and divide by the total payroll to arrive at the benefit rate (percentage). Then proceed as with overhead costs.
A budget narrative is used to clarify items in the budget, and may be helpful to the grantmaker. The narrative may be a completely separate text that follows the budget one section at a time. In most cases, however, simple footnoting-where appropriate-is sufficient.
Accuracy is Critical
Although it has already been said, it is worth repeating: Project your expenses as accurately as possible. Significantly over- or under-estimating can have negative consequences. Take inflation and cost increases into consideration. If there is no way of knowing how much something will cost, clearly state this. Do not guess. Funders do not expect perfection, but they certainly will remember a budget that is sloppy or way out of line.
Financial Statements
Grantmakers may require financial statements, in addition to the expense budget for your project's costs. Common requests include:
(1) A copy of your IRS letter declaring your organization tax exempt. If your organization is not tax exempt, you may need to apply through a fiscal agent. In that case, send a copy of your fiscal agent's IRS letter.
(2) The most recent financial statement, including a statement of income and expenses and a balance sheet showing assets and liabilities at the end of the year. Some funders ask for an audited statement. If you are too small to be audited, call and ask whether an audited statement is mandatory or just preferred.
(3) A budget for your current fiscal year. If you are well into the fiscal year, show actual year-to-date income and expenses next to the budget projections. Include a budget for the next fiscal year if you are within three months of the new fiscal year.
Note: If you are a small part of a very large institution, you may be better off submitting only supplementary materials for your program. Ask the funder what you should do. Grantmakers may ask for other materials, such as a copy of your most recent IRS Form 990. If you do not have some of the requested materials, attach a note explaining why.
After Approval
Some grantmakers expect an accounting upon completion of the project. In such cases, careful records documenting actual expenses must be kept. Some funders may require an explanation for significant variations from the budget.
To summarize, the project budget is a document that will remain with you for the duration of the project, and perhaps beyond. Preparing it accurately, and presenting it as a well-organized component of the proposal may be essential for fundraising success.
You have successfully completed the Proposal Budgeting online course!
There are numerous resources on the internet that will be helpful in drafting a budget. Consult the Resources section of the CFG website.
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