Some nonprofits have a large enough staff to have a financial officer who is tracking and analyzing trends in revenue and expense year-round and developing 18- or 24-month projections from a variety of perspectives; some nonprofits have one person who spends time over a weekend drafting a budget and submitting it a few days later to the board for approval. No doubt your organization is somewhere in between these two extremes. One thing that many of us have in common is we have likely begun the budgeting process for 2012.
Last fall we received some wonderful insights from Cindy Willard, program officer for the Denver-based Helen K. and Arthur E. Johnson Foundation, on the subject of budgeting at a Bagel Banter Breakfast here at RMA. Our roundtable discussion included the following:
Allow sufficient time for your data gathering, discussion, presentation to the board, questions, and final vote. Whether you have a finance committee or not, 3-4 months is about the average time you should spend on this process.
If your program/fiscal year follows the calendar year, appreciate that this is an imperfect process: it is a fact of life that you will begin your work before you have your third quarter results in hand, and your board will be asked to approve your budget for 2012 before you’ve actually closed the books on 2011. Use precise data when you can, make reasonable projections when data is not at hand, and most of all, use common sense.
Define what a budget truly means for your organization. It is not merely “something that the accountant” (or finance committee chair, or executive director) manages in order to meet legal requirements. A budget is a demonstration of your mission priorities–a method of communicating what your nonprofit exists to achieve.
Consider this a learning exercise, not a bookkeeping task. The budgeting process should ideally involve different individuals around the table, helping to bridge the all-too-common gaps between board members, between board/staff, and between various program areas.
Do not risk doing this critical work in “silos” or a vacuum. At best, your time spent as a team working on a budget will uncover any potential weaknesses in your assumptions about what is working well.
Avoid the temptation to simply take this year’s budget and add a few percentage points across the board. If you do this, you are postponing tough but important conversations about measuring success, ignoring potentially important trends that may be shaping your industry, and missing a chance to educate and engage stakeholders about your mission and operations. If you have time, do a zero-based budget exercise with your board: what could you accomplish if the usual constraints were removed? A “blue sky” exercise can help launch conversations that are helpful when you get to crunching the numbers later.
Take care to revisit your strategic plan, if you have one, and translate goals into your annual work plan. Strategic goals should be linked to operations goals for the year, for the quarter, and certainly down to the job description level. Having a strategic approach makes the annual budget much easier to write–and a much stronger roadmap as a result.
Always write a budget narrative. This makes your document accessible to more people and engenders trust and transparency about why certain programs are expressed the way they are. A narrative can give context, too, on the ways that your organization’s budget is unique.
Perhaps most importantly, your annual budgeting process is a powerful tool to evaluate success. Is a pet project actually less successful than its reputation implies, when all the hidden expenses are revealed? Is there an overlooked gem in your program roster that ought to be maximized and expanded, even in these lean times? Are you focusing too much on one measurable (i.e., cost per person served) and not on gauging impact? The time you dedicate to the budget process, the trust you extend to those involved, and the willingness to uncover delicate details can all pay off handsomely in the months ahead.
Consider “dashboard” reporting to your board at each meeting in addition to the usual year-to-date numbers. Cindy suggests a green-yellow-red coding for highlighted issues: green means that all is well and the topic does not need further consideration right now, yellow is something that staff is watching carefully, and red is acritical topic that warrants board attention now. Establishing a calendar for your board with defined check-in points helps assure them that key assumptions they made in the budget are being watched carefully (i.e., landing individual major gifts and other large sources of both controlled and uncontrolled income).
Remember that your board-approved budget for the year ahead is a legal instrument and cannot be significantly altered without subsequent board approval. Your bylaws likely define what actions require board approval; always err on the side of inclusion and disclosure.
Your work isn’t done when the board approves your 2012 budget. An important step in the process is closing out the 2011 books, with a board report early next year on variances and a chance to celebrate successes. A narrative and/or graphing trends can be helpful in this presentation as well.