Looking at just total revenue or total expenses can mislead you about how big an organization actually is. That's where operating budget comes in. By only looking at expenses that are core to the actual daily operations of the nonprofit — and ignoring the rest — you can get a good idea of the actual size of a nonprofit.
Operating budgets for nonprofits are different than operating budgets for private companies. For example, if you look at the Wikipedia operating budget page, it mentions cost of goods sold (COGS) and capital expenditures, which aren't relevant for most nonprofits. What are the general components of a nonprofit operating budget?
For nonprofits operating budgets, you want to exclude pass-through money. These are revenue sources and expenditure areas where the revenue comes in one door and goes out another. The most common example is grants to other organizations, where the money comes in from donations or endowment returns, and goes out to other organizations, but the nonprofit itself doesn't use that money for internal salaries, rent, office expenses, utilities, vendors, etc. With this in mind, here is the basic calculation of nonprofit operating budgets:
The accountants among us will note that this doesn't take into account capital expenditures — like purchasing a new office, buying office equipment, or potential intangible assets — and treats all depreciation as an operating expense. And it doesn't look at how some "Other expenses" might be non-operating expenses. This is because we are limited by the specificity of the Form 990, and while it would be great to have a more precise calculation for the operating budget of organizations, we are limited by the standardized data at hand.
For full Form 990s, here is how we calculate nonprofit operating budgets:
For example, Network for Good is a nonprofit that provides nonprofit fundraising software, often receives donations on behalf of their partner nonprofits, and then passes the donations on to these partners. For 2018, their expenditures were $488,381,333. If we look at their 2018 Form 990, they had $475,384,887 in grants to US nonprofits and 69,269 in grants to foreign nonprofits, for an operating budget of $12,927,177. This shows the importance of operating budgets, because a $13 million organization is very different than a $475 million organization.
For private foundations, filling out Form 990-PFs, the operating budget is listed directly on Part I Line 24, as the "Total operating and administrative expenses". However, you can also calculate it as:
For example, The Eli and Edythe Broad Foundation in Los Angeles listed $1,549,010 on Part I Line 24 (Total operating and administrative expenses), $6,227,381 on Part I Line 25 (Contributions, gifts, grants paid), and $7,776,391 on Part I Line 26 (Total expenses and disbursements) on their 2018 Form 990-PF, for an operating budget of $1,549,010 compared to total expenses of $7,776,391.
Note that many private foundations that are operating private foundations — such as The Frye Museum in Seattle and The Broad in Los Angeles have operating budgets equal to total expenses, because these private foundations exist to conduct IRS-approved exempt activities (e.g., operate museums), versus provide grants to others.
For smaller nonprofits that fill out the Form 990-EZ instead of the full Form 990, the operating budget is calculated as follows:
Looking at the Oshkosh Saturday Farmers Market as an example, Part I Line 17 (Total expenses) is $136,366, Part I Line 10 (Grants and similar amounts paid) is $0, and Part I Line 11 (Benefits paid to or for members) is $0 on their 2018 Form 990-EZ. So all their expenses were operating expenses, and their operating budget is $136,366 (the same as their total expenses).