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Tools You Can Use

Two Guiding Principles for Effective Budgeting

Resource
Financial Leadership for Nonprofit Executives: Guiding Your Organization to Long-term Success

Contents
Two Fundamental Budgeting Principles
     A tool for planning and monitoring
     An inclusive process
Summary

Additional Resources

 

From Becky Andrews, Marketing Manager, Fieldstone Alliance:

HERE IN MINNESOTA, many people say we actually have just two seasons: winter and road construction. As soon as one ends, the other begins. This is often how the budgeting process feels. The current year’s results aren’t in yet and you already must plan for the next year. (Did I forget to say “Happy Holidays”?)

But when done well, the budgeting process can produce many wonderful benefits. This issue of “Tools You Can Use” describes two important principles to budget by. These principles will help you lead a successful budgeting process that results in a useful tool for your organization. The information is excerpted from Chapter 4 of Financial Leadership for Nonprofit Executives: Guiding Your Organization to Long-term Success, by Jeanne Bell and Elizabeth Schaffer at CompassPoint Nonprofit Services.

Two Fundamental Budgeting Principles
There are two fundamental budgeting principles: 1) a budget is a tool for planning and monitoring; and 2) for the budget to be accurate, effective, and uniting, the process must be inclusive. Let’s look at each of these principles more closely.

A tool for planning and monitoring
The act of determining what the organization wants to accomplish, how much that will cost, and how the necessary resources will be generated, is a form of strategic planning—if done thoughtfully. In fact, a lot of strategic thinking and reflection should happen before you begin setting specific income and expense targets. This is a healthy and necessary time of annual reflection and one of the primary reasons that the budgeting process should begin several months before year-end.

Once adopted, the budget becomes an essential financial management tool for monitoring and controlling ongoing organization activities. 

A budget does not exist in a vacuum. Instead it should respond specifically to the organization’s current operating context. Which financial weaknesses will the organization try to address in the coming year? What does the organization want to do differently or better next year?

The management team should also do an external scan of opportunities and threats. Give each team member a data-gathering assignment and hold a special session to report back.

Typical opportunities include:

  • expansion of a program into a new geographic area
  • partnership with another nonprofit to improve services or impact
  • initiation of a capital campaign; and pursuit of a new funding stream

Typical threats include:

  • the loss of a major funding source
  • a new competitor in your mission area
  • unfavorable political changes at the local, state, or national levels

Together, these strengths, weaknesses, opportunities, and threats become the assumptions to which your planning process will respond. Board and management can then set goals for the coming year—before staff begins estimating costs.

Here’s an example of one organization’s goals and objectives:

2008-09 Budget: Goals and Objectives (as of April 15, 2008)

Overall Goal 2008-09 Objective
Stabilize programs and ensure
highest quality
  • Salary increases to all staff
  • Replace computers and equipment
  • Increase direct client support
Improve on key financial health
indicators
  • Build liquid operating reserve
  • Reduce overhead rate
  • Obtain line of credit
Maximize fundraising effectiveness
  • Increase endowment income
  • Increase board role in fundraising
  • Build temporarily restricted balance
  • Maximize cost recovery in foundation grants

An inclusive process
The second guiding principle of budgeting is that to be accurate, effective, and uniting, the budgeting process must be inclusive. Staff will feel accountable to a plan they helped develop.

Unfortunately, the budgeting process often divides rather than unites the organization. Program planning decisions often are viewed as failing to reflect economic realities, while fiscal management decisions are often viewed as insensitive to the programmatic mission of the organization. The leadership challenge is to insist that various perspectives are considered by all parties with the collective goal of developing a realistic and inspiring plan for the coming year.

So what roles do all the players have in an inclusive budgeting process?

  • Board members provide big picture direction and oversight to the process; they also approve the final budget.
  • Program managers plan for the costs needed to accomplish objectives; in some cases, they are also the best people to plan for program-generated income.
  • Development staff plan for the contributed income that can realistically be included as well as the costs they will incur to raise it.
  • The finance manager serves as budget manager collecting input, building the Excel budget workbook, and updating and distributing drafts.
  • The executive director provides overall strategic direction.

A cautionary note to executive directors: don’t pull an all-nighter to whip up the budget the day before the board meeting (or ask your finance manager to do so). You’re almost guaranteeing a less-than-accurate plan and a useless tool for controlling financial activity throughout the year. And good luck holding staff accountable to the budget.

Summary
In years when the organization is not undergoing a strategic planning process, the budgeting process is typically the only formal vehicle for strategic thinking and planning. When it takes into account everyone’s input and a thorough assessment of strengths, weaknesses, opportunities, and threats, the budget becomes a true reflection of the organizational goals and work plan. Once approved, a good budget becomes the means for helping everyone own the financial progress of the organization.

This newsletter just touches on the underlying principles of budgeting. The Financial Leadership book goes into much more detail on the entire budgeting process including specific steps and examples.

 

Additional Resources

Nonprofit Budget Tips
Third Sector New England
www.tsne.org/site/c.ghLUK3PCLoF/b.2429769/k.32C1/Articles__Nonprofit_Budget_Tips.htm

How Do We Prepare a Budget?
Alliance for Nonprofit Management
www.allianceonline.org/FAQ/financial_management/how_do_we_prepare_budget.faq

How to Defend Your Marketing Budget
Nancy Schwartz and Company
www.nancyschwartz.com/defending_marketing_budget.html

Calculating Your Technology Budget
TechSoup
www.techsoup.org/learningcenter/techplan/page4257.cfm?cg=searchterms&sg=budget

Fieldstone Alliance
Services: Our in-depth financial assessment and planning process assists grantmakers, intermediaries, and networks of nonprofits in identifying opportunities for revenue stabilization and diversification. Accompanying the finance recommendations may also be organizational change suggestions such as market realignment, quality improvement, skill enhancement, strategic planning, or staff changes. For more information, contact Tom Triplett at 651.556.4504 or ttriplett@FieldstoneAlliance.org.

Workshops: For more information on workshops, contact Sandy Jacobsen at 651.556.4510 or sjacobsen@FieldstoneAlliance.org.

  • Financial Leadership: This workshop helps executive directors 1) define and strengthen their financial leadership skills, 2) assess financial data and the organization’s financial health, and 3) communicate and plan their nonprofit’s financial future with stakeholders. The workshop spotlights local nonprofit leaders and incorporates interactive exercises and discussions among participants.
  • Coping with Cutbacks: This workshop uses the Fieldstone Alliance publication Coping with Cutbacks to bring nonprofit leaders useful tools and new ways of responding to reductions in funding..

Other Books: Bookkeeping Basics and Coping with Cutbacks

Free Resources:

All the Best,

Becky Andrews
Fieldstone Alliance

December 19, 2007

 

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