Published on February 12, 2014
Tips for Better Nonprofit Budgeting By Mark Mullen
Budget planning for nonprofits can be very confusing. Unknowingly, departments often compete against each other and the organization’s vision and mission for scarce resources. Staffs struggle with understanding where the money comes from and where it goes. And in many instances, employees fail to connect budgeting with the organization’s strategy, mission, and vision. Help staff to connect the dots.
And just as surprising, many nonprofit organizations fail to create program metrics to measure success against revenue/expense ratios. Many nonprofits build their budgets on blind faith and unqualified aspirations. They hope to earn a little more than the year before while maintaining the same institutional footprint. This strategy – or lack of strategy – rarely turns out well. Costs tend to rise each year regardless of any conscious cost cutting measures. And nonprofits end their fiscal year disappointed. Establish clear metrics for each program.
It does not have to be this way. Budgeting can be done thoughtfully, meaningfully, and with an eye on strategy and mission growth. It is not hard constructing a useful annual budget but it does require patience and reform.
Assess financial performance of all programs and services over the previous three years. Take note of trends or patterns. This step will help you see financial effectiveness of each program as well as to develop financial forecasting models. (Target for overall organization operating efficiency should be 75% to 110%. Operating efficiency is: total revenue divided by total assets.)
Assess Financial Performance Group each program into one of four buckets. The four buckets are: • Generate revenue – programs that produce positive income. Total must create enough profit for the organization to pay for the invest and subsidize activities at year end • Break-even – cover all costs (including overhead) associated with running the programs. Many times these programs provide services to other departments through charge-backs. • Invest – new initiatives to meet strategy and vision. Establish a timeline for them to become mission and revenue positive • Subsidize - programs provide a significant mission-related purpose and are incapable of producing enough revenue to support activity
Fill the four buckets with intended programs and services for new budget year. • Develop budget projections for each program – include all revenue and all expenses. This will require all departments to work collaboratively to fill the buckets together determining where the resources will come from (departmental budgets). It also allows each department to see what is expected of them and how their activities connect to the overall organizational strategy. • Keep in mind the budget is both an estimate of future revenue/expense and a benchmark to measure program financial effectiveness during the budget year.
• Program serves as major net revenue driver • Cash generated by all programs in this bucket is sufficient to fund invest & subsidize buckets unless those programs are funded by outside sources & all associated costs are recouped Contributes Most Net Revenue today Generate • Program generates enough revenue to cover incurred costs • Program funded through grants or sponsors and all associated costs are directly recouped • Program meets stated strategy, mission, and vision requirements Break-Even • Investment in program currently exceeds revenue generated by program, but cash flow is expected to turn positive within 4 years or less • Program is necessary part of strategic plan forward • Investment level justified by future revenue potential balanced against risks Invest • Program must be subsidized and is never expected to produce enough revenue to cover costs • Program serves vital non-financial mission purpose Contributes Least Net Revenue Today Subsidize
Go back and adjust budget projections. Do all bucket programs and services comply with strategic goals and vision for the future? If they don’t, get rid of them as they are wasting your limited resources. Determine where resources (money and time) are required both internally and externally to meet strategic plan and vision. Prioritize programs according to mission and strategic vision. Do only what you can afford to do.
Assign financial responsibility of each program to a senior manager, even if the program is a collaboration between departments. Accountability is essential if programs are to be impactful and efficient. Be sure that each senior manager has access to real-time month-tomonth revenues and expense for proper oversight of programs.
The purpose of the budget is to guide every-day operational decisions. It is intended to be flexible and adjust to environmental or unforeseen circumstances. All staff should meet quarterly, if not monthly, to review budget projections. Do not wait for an annual review as it will then be too late to adjust the budget to meet strategic goals.
Adapted from Book: Organizational Strategic Thinking: A Practical Guide to Embedding Strategic Thinking into your Employees’ Every day work Schedule by Mark Mullen ISBN: 149475679x ISBN – 13: 978-1494756796 http://www.amazon.com/dp/149475679X/
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