By: Steve Zimmerman
As nonprofit leaders prepare for budgeting season they face no shortage of pressures. The lingering effects of inflation and increased compensation to attract and retain talent. Uncertainty in the political and funding environment compounds this effect. At the same time demand for services and the complexity of constituent needs continue to increase.
Budgeting is often seen as a financial exercise within organizations – a math problem meant to be solved. But this view misses the opportunity to leverage the collective intelligence and experience of board and staff. The budgeting process is a crucial time to build a shared understanding of the organization’s context. It is also a time to have grounded, honest conversations about what the organization can accomplish and how much that will cost. The budgeting process should answer three essential questions:
- What is the impact we can have?
- How do we build an organization that reflects our values?
- How much impact can we afford?
What is the impact we can have?
Prior to putting any numbers in a spreadsheet, budgeting should begin with a discussion about impact. While the process is inherently about looking forward and projecting the future, successful budgeting builds on past efforts by looking backwards and reflecting. Leverage the knowledge of constituents and the organization’s staff to understand where the organization has had success, where it has been challenged and how both constituent needs and the environment in which the organization operates are changing. This includes understanding what other complementary or similar organizations operate in the community. This also includes how our programs might differ or be stronger through collaboration.
All organizations have big visions for how they will strengthen and enrich their communities. However, the realities of funding, staffing, the complexities of constituent needs and other external forces make execution challenging. A candid conversation that grounds and informs the budgeting process leads to a more successful budget. It also allows the organization to amplify promising practices or new innovative ideas to achieve greater impact within programs.
Ultimately, this process needs to foster a discussion about where to invest to maximize impact. After all, no matter the budget size, no organization has the resources to be “all things to all people.” To do so requires a willingness to engage in tough conversations and determine where the organization is most likely to have impact and the financial resources necessary to achieve it.
How do we build an organization that reflects our values?
Budgets are numerical expressions of an organization’s strategy and values and nonprofits are a people business – meaning that for most organizations, personnel costs are the largest expense. Coming out of the pandemic, the disruption in the labor market laid bare the reality that many nonprofits used passion for the mission as an excuse to underpay employees. Nonprofits did this with good intentions, driven by a shortage of funding and a desire, or sometimes funder demand, to reach more constituents. Creating impact requires a competent, skilled staff. For organizations to deliver results they need to compete in the labor market by offering equitable, living wages. The budgeting process is an opportunity to address this challenging issue.
After previously discussing the desired impact, it’s also important to discuss how to deliver that impact in a value-based manner. Calculating the numbers isn’t hard, but again it is about sharing and candidly discussing the results with the team and having the courage to plan for change. These conversations should explore total compensation including pay, time off, professional development and other benefits. Some organizations may have the resources to significantly change their compensation structure, but most won’t. Rather, this is an area where change may need to be more incremental and where leadership will have to decide “How much impact can we afford to have?” and the scope of the organization.
How much impact can we afford?
This is the essential question budgeting is trying to answer and, unfortunately, where most people begin the budgeting process. However, with an understanding of the organization’s potential impact and an understanding of what is required to deliver impact, leadership is well positioned to understand the financial context at a programmatic and organizational level.
From a programmatic perspective, understanding the financial contribution or subsidy required for each program allows leadership to begin to grasp the return on investment. This entails calculating the fully allocated true costs of programs. This entails viewing programmatic, administrative and fund development expenses as essential and integrated for success. Utilize financial statements from the current year to understand how the program has historically performed.
Financial performance shouldn’t be limited to mission-specific programs, but also an exploration of revenue streams. Each revenue stream is in essence its own business. Each stream requires a specific set of skills, infrastructure and relationships to fully execute. Understanding how each revenue stream is performing and where an organization is gaining traction will provide insights as to where future investment may be warranted.
This approach might also require building financial knowledge among everyone in the organization. Seize the opportunity to do so as an understanding of both programs and finances enables people to meaningfully contribute to the strategy of the organization.
From an organizational perspective, the level of reserves and financial trends should be explored to determine the need for increased savings to withstand economic shocks or the opportunity for investment. This context helps leaders set the desired bottom line for the budget. Can the organization afford a budget with a deficit to expand reach or innovate programs? Or does the organization need to generate a surplus to build financial resilience? These are, once again, not easy discussions with no “right” answer. However, these questions are worthy of discussion to ultimately achieve a goal to informed budgeting.
Embrace the Tension
The list of day-to-day tasks within an organization can seem relentless. As hard as it can seem, harnessing the power of the budgeting process to recognize the connectedness within an organization – from impact to people to finances – empowers teams to work together to move missions forward.
Nonprofits tackle some of society’s most intractable challenges and do so amid changing demographics and the tearing social fabric. Given the inadequate capital structure of many organizations, persistent donors focus on overhead and the complex, systemic nature of the work needed on the issues organizations address. It is challenging for nonprofits to achieve big audacious visions. The result is that organizations overpromise and underdeliver, resulting in cynicism and the loss of trust.
Rather, the budgeting process should be an inclusive process that allows board and staff to have important conversations that clarify what the organization intends to accomplish, what are the values an organization stands for and what that will cost. Doing so builds a shared understanding of the key elements and assumptions for sustainability during a time of uncertainty. Doing so empowers leadership to be adaptive as they implement.
At the end of the day, budgeting is about setting strategy. Budgeting is a reflection of who we are and “why” we engage with a nonprofit. While the answers are informed by spreadsheets, none of them come from the spreadsheets. So, before you pick up a pencil to budget, take a moment to have a conversation.