Howard Chi, Chief Operating and Financial Officer San Francisco SPCA and Board member Zuckerberg San Francisco General Hospital Foundation.
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In 1951, Palmer Paint introduced a paint-by-numbers system. It was a way to replicate painting masterpieces simply by dividing the picture into shapes. Each number corresponded to a color. It was a great system to simplify and break down a complex masterpiece into steps that even a beginner could follow.
A budget (or what I like to call a planning-by-numbers) is similar in concept: You can break down each department and line item easily by translating the specific financial outlay (color) with the goals (shape) that a nonprofit is expecting to accomplish for the year.
A budget is a translation of what your strategic plan is for the year, and it is broken down into numerical form. It is one of the primary guiding financial documents of many nonprofits. In essence, the budget is how much money you have within your organization to achieve your mission.
The annual budgeting cycle is a time for setting or updating meaningful metrics and goals for that year. It is also imperative that these measures are in line with your overarching strategy and are being translated into financial line items. These goals hand nonprofits a tool that they can use to anticipate financial problems, set a baseline to measure the expected and actual financial experience and, most importantly, have a barometer of success toward their mission.
Based on my COO and CFO experience, I'd like to share some insight on the importance of intentional budgeting for nonprofits.
Planning
While making a budgeting plan, it is important to revisit the objectives, priorities and activities from strategies in the past. Planning lends itself to annual reflection, which is a necessity if a nonprofit is to maintain its financial stability.
Many budgeting experts (myself included) recommend starting early (i.e., well before fiscal year-end). Some organizations start 30 to 90 days before the new fiscal year, but this primarily depends on the complexity and size of the organization.
Strategic planning is essential, even for nonprofits that can discern the direction they are headed in. It is an important step to ensure that these discerning nonprofits continue to understand what must be done to accomplish their objectives, how much it will cost and, most importantly, the ways in which the necessary resources will be generated and used.
Monitoring
The purpose of the budget isn’t just to finance a nonprofit’s activities. It becomes a powerful financial management tool that is highly effective in monitoring the fiscal activities of that nonprofit throughout the year.
As the reporting cycle draws near—ideally every month's end—the nonprofit organization gets an opportunity to compare how closely it stuck to the planned budget. This can be reported by using a Budget to Actuals financial statement. This shows how the nonprofit performed by comparing the actual revenue and expenses with what was planned or budgeted. Any deviations or variances in the actual performance will need to be addressed.
The key to this approach relies on two main variables. First, its accuracy, and second, its timeliness. Both are required for maximum effectiveness of this barometer of success. I recommend the Budget to Actuals report be completed on a monthly basis and reviewed in a timely manner with key stakeholders of the department and executive management.
A flux analysis (short for "fluctuation analysis") is also a handy addition to this tool. This is a written narrative for each line item on the differences or changes from month to month. These changes cause variance. For example, a program's membership revenue might see a 35% variance because, of the 350 new memberships planned, only 225 were actual memberships.
Understanding the cause of each variance makes it easier to take corrective action and get back on plan. Such an understanding can be reached in several ways, depending on the source of the deviation. For instance, a program could have become more expensive than was originally anticipated. Management, then, has numerous options to choose from, including added staff efficiency, staff reductions, limitations on any certain line items or non-personnel expenses, revisiting and revising the plan to reflect the level of expense it now demands, etc.
The power of the budget and its reporting will help lead to timely and consistent strategic discussions between the staff and board members. In that way, there’s a higher chance of a nonprofit achieving its mission and its winning aspirations.
The Importance Of Inclusivity
Inclusivity is crucial for budget planning if it is to be accurate and effective. It isn’t just the executive director and the finance staff in the upper echelons who are involved in the process. They should coordinate with the rest of the management team and board members.
It can be difficult to engage people from different departments because they will each have their own priorities. And with multiple perspectives being thrown in the mix, it can be challenging to get the program planners and fiscal managers on the same page.
The efficacy of the budget as a financial planning and monitoring tool could be lost if management simply prepares it in a vacuum without stakeholder inclusion in the process.
Nonprofits that give their employees a chance to be a part of budget development will be giving them a stake in the process and ensuring a greater chance of adoption. Without it, leaders will find it difficult to get the program and development staff to feel accountable for its success.
Forbes Nonprofit Council is an invitation-only organization for chief executives in successful nonprofit organizations. Do I qualify?
