In the past, the leaders of nonprofits set budget and goals, and everyone got in line. But that doesn’t work anymore, says Teresa Schaffer, CPA, director in assurance services at SS&G.
“Today, nonprofits have to use their budgets in managing their business toward outcomes,” says Schaffer. “Instead of the executive director and the chief finance officer developing what they think the annual budget should be in a silo, the directors of the individual operating units and/or cost centers need to first establish their best estimates of achievable results, to build a realistic budget from the bottom up.”
Smart Business spoke with Schaffer about how nonprofits can build their budgets from the bottom up and how to keep people accountable to the goals.
What are the components of planning a budget?
The management team of an organization needs to set objectives by asking themselves, ‘What will our core programming be in the coming year; what is our development goal; and what will our major fundraising event be?’ After considering these objectives, management should then evaluate the fixed and variable cost structure necessary to support and achieve the desired objectives.
Where do you begin developing the budget?
Budget planning should begin about six months in advance of the next fiscal year. The actual budget process typically begins approximately four months in advance of the next fiscal year. The process should begin by developing a complete vision with your executive team, including the board of directors. Management and the board should consider what they desire the organization to look like in 12 to 18 months, and what the outcome of this year’s budget will be.
Based on that overall vision, the individual cost center managers or departmental directors should then outline what costs they need to incur to achieve the overall goals, and what expected revenues those costs will produce. Those individual plans will serve as the basis to build the budget from the bottom up. Given that the budget process begins four to six months before the current year results are known, the budget should continue to be revised to reflect actual current year operating results as much as possible, to ensure that the starting point for the next fiscal year is consistent with the end point of the current year.
The benefit of building a budget from the bottom up with consensus of all management is that it improves accountability. When each department has input in the budget, each department is accountable. People need to be accountable for results, because otherwise the budget gets lost and becomes meaningless. Adhere to the budget, hold your team accountable to those results and use it to adjust.
How can an outside expert help a nonprofit through the process?
If a nonprofit organization has never completed the budget process from the bottom up, management may want someone with experience at the table on the front end of the process to get the organization thinking about all the ways budget goals can be eroded. This person can help an organization think about the best way to disaggregate the organization into responsibility centers, and also can help think through the little areas that can incur costs — elements as simple as office supply expenses and postage. Also, someone external to a nonprofit organization can ask the difficult questions, such as, ‘Do the net results from certain events really demonstrate the benefit to the organization, or is it time to re-evaluate some traditions?’
A consultant can also help you develop metrics for performance. Sometimes a budget in whole dollars doesn’t make sense, especially for organizations that deliver units of service that are reimbursed. If reimbursements fluctuate, whole dollars may not tell the entire story when comparing budget to actual. Management needs to consider the key indicators of performance; for example, units of service, number of employees, hours of overtime incurred, etc. A budget prepared on the basis of whole dollars alone may not be helpful if management loses sight of the indicators.
What else do you need to consider when planning?
An annual budget is not just income and expenses, but capital outlays, as well. When planning for a given fiscal year, keep the capital budget in mind. Should management fund infrastructure investments for new software and systems? What will the organization’s information and technology goals be three and five years from now, and how will the organization achieve those goals?
Once the plan is finished, is the work done?
Too often, a strategic plan is completed, and it sits on the shelf where everybody forgets about it. Then, in year two or year three, the budget starts to take a course independent of the strategic plan. There might be a new capital project that management wants to pursue, or there might be new technology in which management wants to invest, yet the plan said nothing about those strategic concepts.
An organization can veer off course if it doesn’t keep the strategic plan at the forefront of the budget process.
What would you say to nonprofit executives who say they are going to keep doing business as usual?
I would argue that organizations can’t afford to loosely manage operating results. Management needs to think of the community of donors like SEC companies view their shareholders. If the community gets the sense that dollars are loosely managed or mismanaged, support of the organization will decrease.
A nonprofit that doesn’t keep its eye on the horizon is not sustainable in today’s economy. Management can no longer guess at the fundraising goal or use it as the ‘plug’ to break even; the goal really needs to be realized now. As a nonprofit organization, anything you can control, you have to control now.
Teresa Schafffer, CPA, is a director in assurance services at SS&G. Reach her at (440) 248-8787 or TSchafffer@SSandG.com.