Non-Profit Deep Dive Part Two: Budgeting As An Act of Imagination And An Act Of Commitment

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People acknowledge, grudgingly, the need to create a budget. After all, what proper organization does not tell its board what money will come in next year and get their OK to spend it? The temptation may be to plod through it as an act of pure formal compliance, but that misses the point.

The budget process truly starts by summoning the imagination. Very simply, you have to picture what could happen next year. What you might be able to do and what might happen. Whether you think your service levels will increase next year. Whether you will do anything to improve your service.  But also, what could go wrong? Are there risks lurking out there you need to consider, something more immediate than a cataclysmic asteroid impact?

All of this potential translates into dollars and cents. New clients might bring new revenue, but also new costs to serve them. Improved service might do the same. If one of your funders shifts priorities, the grant you counted on every year could evaporate and leave a hole in the budget—but maybe you can take (and fund) some actions to avoid or mitigate that.

You have to be prepared to imagine the best and worst that could happen, to picture the shape of the upside and the downside throughout your organization, and therefore throughout your budget. This requires openness, but openness on several levels. You can’t be afraid to think big, you can’t sweep challenges under the rug, and you also have to be willing to ground your ideas in reality. If you picture getting a grant to fund a new program, what success rate have you had in winning that similar funding for comparable programs? You may fear that improved economic conditions will make your salaries uncompetitive, but how much attrition do you really have?

Once you go through an open and rigorous process of imagining your organization in the next year (or more), you decide what you can most comfortably accept as “likely.” You commit to that conclusion by putting it in the form of budget numbers, asking your board to sign off on them, and working in good faith to reach them through the year. A budget is a compact—between board and staff, between management and staff, between the programs themselves. “We believe we can achieve what we’ve documented here. We believe the underlying assumptions. We will stand by each other to achieve this together.”

Several things will allow you to fulfill the promises of imagination and commitment in the budget process. You must communicate constructively. You have to be positive but realistic. And you need to look for opportunities to ground your process of imagining, deliberating, and deciding in a grasp of reality.

There are tools you can use to solidify that ground. The simplest is just cobbling together a budget, line item by line item. With each piece, you put a brick on the wall and you have to think about how much you can rely on it. You will also want to analyze trend information, and can move from that to projections for next year and beyond. You may need data from other sources—maybe something that tells you about the volume of activity, the quality of work, or compares yours to other organizations.

The move from imagination to commitment is where reporting and projection tools connect to budget tools. If your organization takes seriously both aspects of the budgeting process, it becomes more important to find systematic ways to connect data and modeling to budgets and from there to accounting records. Data and projections spur and inform the imagination, and the budgets and the record of results allow you to honor your mutual commitments.

Reposted from Catapult ERP Blog
Written by David Maddox

 

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