Latest news, alerts, and events.
Latest news, alerts, and events.
If you have a fiscal year that begins in July, this is your budgeting season. And it likely means you are putting the finishing touches on how you think the future will unfold for the next year. (For those of you with a January or October fiscal year, your season has passed, and you are well on your way to living your budget.)
I admit that numbers were not my thing when I started in this work, but I quickly learned to be a champion of the budget when I figured out that while it is certainly made of numbers, budgets are far more than that.
Budgets tell a story of your organization. They tell you and your team about your vision for growth and your fears and insecurities about the future. They tell you how you will manage risk. They tell you about the outcomes you want and what you need to get there. 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 and how you see those relationships – both earned and charitable playing out over the course of a year and even beyond. 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?
We are all starting this conversation from different perspectives. Some of you already get it and see it. Some of you have long ago found your eyes glaze over at the first signal that numbers are involved. Some of you wish for deeper conversations from the board, finance committee, and/or staff about why a budgeting tool matters. Some of you are brand new to budgeting and are not sure where to start. No problem, there is a place to start the conversation for each of you. Here are some ideas:
None of these questions are easy because a separate line item does not necessarily exist that perfectly aligns to each question or each set of answers. And, with rising operational costs, a dramatic shift in federal investment and its ripple effects, and increased demand for many of our services, we don’t have to look too far to know that budgeting in today’s climate can be difficult, scary, and complicated or simply uncomfortable. Unfortunately, this discomfort is so true that we still have far too many groups who are not budgeting at all and just hoping that it will all work out. Yet, if our goal, which I hope is true for all of us, is to thrive and not merely survive in how we deliver our missions, then our best approach is to take a deep breath, gather some help as needed, and shift the context of the conversation.
In my experience and for those on our team who are working with nonprofits and tribes to consider how to create, use, and think about budgets, the budget document can turn into an avenue for inspiration and the necessary compass that moves the team in the same values-aligned direction.
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 what matters the most given the constraints each organization must face.
Many of these steps are straightforward but a few deserve some exploration.
Gather the team is about creating an environment that welcomes into the same conversation those who think in numbers and those who think in words or ideas. Starting these conversations by centering your organization’s core values provides common ground to address what is most important. The process for team gatherings to create a budget is not a “one way” solution. Maybe it starts with staff, then moves to the board finance committee, and then to the full board for discussion and approval. If you don’t have staff, does it move from the full board, and then to the committee and back again? If you don’t have a finance committee, is there another pathway for engagement before getting it to the full board?
While the final result is important, the process of centering values and walking a meaningful process is paramount. For those with no finance committee, budget season can be your catalyst. A well-constructed team of a few board members, a trusted and knowledgeable person or two outside the board, and the CEO and CFO or equivalent, can be one of your best assets. The whole board is financially responsible for the organization and a steward of the assets, but the committee provides the space to learn, test assumptions, and create scenarios for potential opportunity and risk. It provides a check and balance to the full board and a think tank for staff leadership. If I sound like this committee has magical powers, then 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 and the current constraints and opportunities in the marketplace. Since the budget is the financial representation of what the organization wants and needs for mission to thrive, then we need to ground it in truth. Unfortunately, that is not always what happens. 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 “make up the difference” to get them to a balanced budget. This is typically a recipe for failure for most groups because they did not base their numbers on data from the previous year, nor do they plan to increase their capacity to meet the new goals. This mindset of wishful thinking can be applied to government funding, earned income strategies, or even expectations of recruitment and retention. Reviewing actual numbers from last year is the best place to start. Then ask yourself and the team, what will be different this year or in the coming years. From there, it is about the team’s risk tolerance. Taking a more conservative approach to income and expenses while also factoring in the current and predicted marketplace is all part of the strategy.
Maintain the core before adding “what’s new” based on strategic or annual goals that take your mission operations beyond business as usual. This may seem obvious, but as nonprofits we have been conditioned by well-meaning funders and donors to think about what can be new and shiny above valuing the core functions of our operations. As a result, we are often under resourced operationally and over stretched programmatically. Too often this leads to undo stress and less effective impact. This vicious cycle is only amplified by staffing shortages, massive shifts in federal policy and funding, economic uncertainty, increased demand for services, and more. The budget process allows us a place to stop, pause, and reflect on what is core to our mission. Asking, answering, and reassuring within the team that the core is funded before adding the new things can be a powerful conversation in any room.
Plan for adaptation as necessary. This is likely a new step for many organizations. But like any business that wants to move ahead – and in our case best serve the community – we often need to think differently about how we deliver on mission. Our environment is rapidly changing around us. It will take financial investment to adapt, which could show up in staffing, technology or other programmatic lines. It also could show up as a savings goal for future shifts that will require more financial reserves than we have at the moment. Having a conversation on what it will take to adapt now or in the future can position your organization to navigate both prosperous times and eras of economic uncertainty without jeopardizing what is core.
Another way to talk about Step 6 of looking into the future (reserves, deferred maintenance, capital etc.) is to think of it as a Full Cost Budget. Too often the annual operating budget misses the mark of including the full operational cost. For example, full costs include maintenance and deferred maintenance. In the age of a tech-based workplace, these costs are essential and increasing but often forgotten. You might also have debt repayment where you will find interest among the operational costs, but the reduction of the liability (debt) on the balance sheet is often overlooked. A final example is the goal to create or grow reserves for future stability.
Engage your board in monitoring. Unfortunately, many board members and staff 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 to consider financial reports as a 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 a one-page stoplight dashboard 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.
There are few unicorns in our work, but a budget that is created and implemented through a journey can work wonders. If these ideas are new to you, or you have questions about the other steps, contact us. We are happy to help you fully implement this critically important tool in your toolbox.
To each of you, I wish a happy budget season.
Laurie