Budgets as a Values Document
To everything there is a season and, yes, there are budget seasons. We are in one now – for federal and state governments, and for your nonprofit. If you have a fiscal year that begins in July, you are very likely drafting a budget for the next year. (For those of you with a January or October fiscal year, your season has past, and you are well on your way to living your budget.)
Budgets come in all sizes and all complexities. They can be simple and straightforward, as well as incredibly detailed and nuanced. They can be about millions of dollars or about thousands. All of our organizations benefit from this financial roadmap, and yet in Alaska we know from our recent survey work that too many organizations (19%) are operating without a budget. This seems counterproductive at best. So today, I am asking every organization to consider this tool in your toolbox.
Budgets are certainly made of numbers, but they are far more than that. Budgets tell a story of your organization. They tell us about your vision for growth and your fears and insecurities about the future. They tell you what your organizational house looks like and if you are solid and resilient, living on the edge, or partnering for strength. They tell you who you partner with and what drives your economic engine. Importantly, they also reflect your organizational values and moral compass.
Don’t just take my word for it. Spend some time looking at the story of your own numbers. What do you see? For those of you whose eyes glaze over when budgets are put in front of you, here are some questions you might ask to form your narrative:
- Can I see the core values of my organization reflected in the budget? Where? How?
- Can I see how we have funded the goals in our strategic or annual plan to ensure they will happen?
- Can I see how the budget reflects equity for the people who will be affected by it? For example, does it show that the organization is committed to a living wage for employees?
- Can I see how I am not just setting the organization up for success this year but for future success? In other words, if I can build it, buy it, or fix it today, how will I sustain it tomorrow?
- This is perhaps my favorite question. Can I see what difference the money will make? More than money, can I see and measure mission success?
None of these questions are easy. We don’t have to look too far to know that budgeting can be heated, difficult, and complicated. It can also be innovative, inspiring, and provide clear direction. In the midst of all of these competing experiences, the budget is a document that expresses the values and goals of the mission, and we are the stewards. Don’t miss the opportunity to see the story not just the numbers. How are you as a board and staff addressing these questions in your own budget?
Below are 11 steps to ensure that your budget is not just a collection of numbers, but a process and a product that is grounded in your mission.
- Gather the team
- Tell the truth based on data
- Set your goals based on your strategic and annual plans
- Plan for innovation and adaptation
- Look to the future (reserves, deferred maintenance, capital, etc.)
- Set your numbers
- Connect to your values as a litmus test for the numbers – adjust as necessary
- Engage the board in critical conversations on the numbers – why they matter and what they are rather than just the numbers
- Engage the board monthly or quarterly in reviewing the budget and its implementation, both through the finance committee and the full board
Many of these steps are straightforward but a few deserve some exploration.
Gather the team. How are you ensuring your budgeting process is working to get the results that are best for your mission? Does it start with staff, then move to the board finance committee, and then to the full board for approval? If you don’t have staff, does it move from the full board, and then to the committee and back again? While the final result is important, the process for getting there is critical. No single right way exists to do this work, but there are certainly better practices than others.
One of the critical pieces to a better practice is an active finance committee. Unfortunately, we have noticed at Foraker that every organization that has closed its doors or faced financial crisis over the last decade had one thing in common – no finance committee. No group was in place to provide an appropriate amount of checks and balances to the board and staff. There was no sounding board. There was no safe place to have difficult conversations. Finance committees when constructed well, with a few board members, a trusted and knowledgeable non-board member or two, and the CEO and CFO or equivalent can be one of your best assets. The whole board is financially responsible for the present state of the organization and a steward of the future of its assets, but the committee provides the space to learn, to test assumptions, and to create scenarios for potential opportunity and crisis. They are the voice to the full board and a sounding board for staff leadership. If I sound like this committee has magical powers, than I am getting close to describing the gifts of a good finance committee. Some of you only know this committee as a mythical creature, but I promise that you can all make it real with just a bit of effort that includes strategic recruitment, a clear job description and some helpful training.
If you have a finance committee that is high performing – that’s great. If not, that is your first step. Step two is outlining how the rest of your team will be involved in drafting, reviewing, and approving the budget. Step three is engaging all the people who get to live the budget throughout the year. Again, for some of you I just described a process that involves six people, and for others it is a much larger endeavor. Whatever the size and scope, the important part is that a clear journey is outlined for the team to follow.
Tell the truth based on data. Drafting the budget is not just about who does it – it is also about what goes in it. If the budget is the financial representation of what the organization wants/needs for mission to thrive, then a lot of truth telling must go into this process. For example, we have seen plenty of budgets that are not grounded in their own facts about fundraising goals. These are organizations who typically create a budget and let the fundraising line in the budget “make up the difference” to get them to a balanced budget. This is typically a recipe for failure for most groups since they clearly did not base their numbers on the data from the prior year, nor on a plan to increase their capacity to meet the new goals. Certainly exceptions exist to this scenario but they are rare in our experience. The best predictor of the future budget is the past. Bring your comparisons of budget to actuals to the meetings. Engage in the difficult conversations about what is possible given your capacity. A budget strategy is not made up of wishes and hopes.
Plan for innovation and adaptation. This is likely a new step for many organizations, but just like any business that wants to move ahead – and in our case best serve the community – we need to think differently about how we do things. Perhaps your innovation fund will be used for some small experiments in service delivery, or for some deeper collaboration. Regardless, it takes financial investment, and it takes board and staff buy-in. Including this item in your budget indicates that you are having conversations about what it means for you, and why it is important. If you are just starting, I would suggest setting a modest dollar goal compared to your overall budget. Some organizations get their start by allocating 1% of the budget to this category. The goal is not to spend it right away, but to have a process for using it when you can best produce results for your community.
Engage your board in monitoring. Unfortunately, many board members do not understand how to read a nonprofit financial statement. Equally unfortunate is that most will not admit it. For this reason, and for the understanding that the board is ultimately financially responsible for the organization, we strongly recommend that board financial statements are simple, high-level, and come with visuals and narratives, not just numbers. More and more, I have been recommending to nonprofits both large and small some version of red light, green light visuals. You remember this game. Red light means stop. In this case something is terribly wrong that needs immediate board and staff attention. Yellow light means we need to closely watch a trend line or a particular funding source. Green light is a moment to breathe or perhaps even celebrate. Having one page accompany your balance sheet, cash flow statement, and budget-to-actual document that shows the red, yellow, and/or green lights can ensure that everyone is involved in the discussion and more accurately fulfill their responsibilities as board members.
If these ideas are new to you, or you have questions about the other steps, contact us. We are more than happy to help you fully implement this critically important tool in your toolbox. While the state and the country grapple with their budgets, I have faith that you, too, are working on this process and are coming to the answers that best meet the mission and communities you serve. To each of you, I wish a happy budget season.