Budgets and the Smaller NFP Organization (Part 2)

Budgets and the Smaller NFP Organization (Part 2)

In a previous blog, we reviewed how important mindset was to the budgeting process of smaller NFP organizations. If the budget is viewed as a chore, the end product will often not be worth the paper it is written on. (Did I just give away my age with that reference?) We saw how even the categorization of expenditures ( capex, opex, riskex and stratex) influences how the budgeting process is perceived. Ultimately, effective budgeting ties into the vision and mission of the organization. 

Here are some additional tips about making the budgeting process more effective: 

1. Avoid cost allocations as much as possible when budgeting.  Yes, all fixed costs must be covered. There is no question about that. However, allocations of those costs often lead to incorrect decisions. Look for “cost drivers” rather than allocating expenses across a client base. Cost drivers in the NFP industry will be the subject of a future blog. 
2. Look towards developing client cost computations in addition to  program costing.  A typical NFP program will measure the cost of a program being provided rather than looking at the total cost of a particular client. Some clients are more cost intensive than others. Should particular clients be directed to other agencies or NFP entities for service? It is difficult to be all things to all people.  More on this when we examine cost drivers in the future. 
3. Don’t forget to tie the budget into the strategic plan. The  budget should be prepared with one eye on daily operations and one eye on the strategic plan.  Many strategic plans are completed and then simply forgotten about.  They often contain operating projections for three to five years.  Each annual budget is an integral part of the strategic plan, and the current year budget should be the first year of financial projections in the operating budget.  By doing this the organization is forced to revisit its strategic plan at least annually.. 
4. Get into the habit of forecasting frequently.  First let’s differentiate between budgeting and forecasting.  For our purposes, budgeting is the process of planning activities and expenditures for the year.  Forecasting is the periodic updating of the budget. One criticism of budgeting is it becomes outdated quickly. Frequent forecasting alleviates this problem.  Again, we are talking about a mindset.  Forecasting can be done quickly if one only deals with the major items in the budget. Timely and more accurate forecasting produces information management can use to run the organization, 
5. The budgeting system should produce and measure key performance indicators (KPIs). At the end of the day, the budgeting system should produce a small number of KPIs. These KPI’s will be part of the balanced scorecard management will be judged on. Additional information about balanced scorecards is available on this website. 

I know this and the previous discussion have been a just a survey of budgeting issues.  If you want to discuss how to improve and automate your budgeting process, please don’t hesitate to contact me!