Facilitating Strategic Budget Plans & Resource Development

by mark on March 15, 2010 · No Comments

For many nonprofit organizations this is time of the year where the board and staff turn their attention to drafting a budget to guide business operations for the next fiscal year.  For many agencies, this annual ritual simply starts with taking last year’s budget and incrementally scaling the numbers up or down depending on the known and likely commitments of funding for the next year.  While this method is reliable when continuity between years is strong, an increasing number of nonprofits are still facing volatile economic environments.  For organizations confronting “revenue uncertainty” cutting and pasting from last year’s budget is likely inadequate preparation for the year, or years, ahead.  Organizations’ seeking not only to survive but thrive need to develop an intentional process to facilitate the development of a long-term budget strategy.  Having many years experience creating and managing budgets in career, consultant, and volunteer positions (across nonprofit agencies of all shapes and sizes) I would like to suggest five elements of a facilitation process that will strengthen a strategic budget planning process.

Define your Funding Model:  It likely comes as no surprise that the agency budget framework for many small to midsize nonprofit organizations is simply the amalgamation of the individual program budgets that have been built in response to specific grants and/or contracts received by organization.  Unfortunately, even some larger organizations fall prey to this “Lego Approach” to budget development.  As new grants, contracts or donations are obtained, the resources are snapped into place to fill budget holes or to expand programs as required by the funding restrictions tied to the new revenues.  Agencies that would raise their hands if asked if they use the “Lego Approach,” would do well to consider convening their board for a strategic conversation about developing an intentional framework to guide the budget process.

In recent years, there have been a number emerging perspectives in nonprofit fiscal management and philanthropy that, taken together, help nonprofits develop a strategic perspective for long-term revenue development.  Several articles and books are referenced at the end of this post, however, some of the key concepts that form the basis of the conversation should include: a) a review of Pratt’s funding archetypes and the ten funding models recently presented in an article in the Stanford Social Innovation Review; b) exploration of revenue autonomy, reliability and concentration, and c) operational overhead.  The goal of this conversation is to develop a working understanding of the concepts and prepare the board to apply these principles to creating a strategic framework for their organization.

Assess your Overhead Costs:  One unfortunate legacy that plagues nonprofit organizations is that efficiency is often measured by overhead cost. The assumption is that nonprofit overhead is a proxy measure of efficiency, in essence, suggesting that the lower the nonprofit overhead costs, the more efficient the nonprofit is assumed to be.  This perspective is reinforced by many funding agencies who cap operational overhead at an arbitrary number (like 8%, 10% or 15%) when awarding grants and contracts.  However, over the last few years several studies have begun to challenge this conventional thinking with a growing chorus of voices suggesting that the antiquated approach to efficiency actually sets up a nonprofit “starvation cycle.”  Creating a strategic approach to resource development and budgeting will require boards to develop an accurate administrative overhead budget. This exploration by the board will need to account for both current administrative costs and costs associated with capital investments that need to be made in such areas as human resource, technology, fiscal, that have been deferred expenses.  The resources listed below offer several good starting places for developing an accurate administrative overhead budget.  Having a realistic understanding the true agency overhead costs will help your organization develop realistic plans to align revenues with true costs.

Value your Staff:   A third component of a strategic budget process is to create a compensation system that values and rewards staff.  Much akin to the under-investing in agency overhead and infrastructure, under-investing in staff is another strategic hurdle that nonprofit agencies need to understand and overcome.  Again, conventional wisdom suggests that nonprofit employees work for intrinsic rather than extrinsic value, which translates into lower salaries and benefits.  Unfortunately, when a critical mass of nonprofit agencies operates under this assumption it creates a market that supports under-compensating staff.  On more than one occasion, I have heard a well-intentioned board member say, “Our employee pay and benefits are at the market rate.” Unfortunately the benchmark should not be “market rate” but should be oriented around the equity of a living wage and incentives that foster the recruitment and retention of high performing employees.  Again, the goal of building a compensation model is to create a resource development goal for an organization that can be supported by intentional objectives to be pursued in a priority sequence.  For example, I know of an agency that laid out a strategic agenda to sequentially develop a living wage structure, strengthen the insurance options, increase retirement contributions and add an employee assistance program and educational benefits.  The organization is supporting this strategy with a specific multi-year resource development plan focused on strengthening compensation.

Start from Zero:  For those organizations locked into program grants and contracts, many budget decisions were established when the grant or contract proposal was submitted. For those programs that have been funded over multiple funding cycles, the budgets (and ideally work scope) have expanded or contracted based on available funds. However, even if a program budget is set, it is a very productive exercise to start from zero and rebuild a program budget.  In other words, suspending the current program budget, if you were to create an ideal budget for the program services being delivered, what would that budget look like?  If staff compensation was fully loaded and the appropriate overhead was charged to the program, how much money would it really take to run the program?  Creating a zero-based budget allows you to compare where you should be (relative to the revenue and expenses) to where you actually are today.  The variances identified are the program budget gaps that are being absorbed or ignored at the peril of your agency’s fiscal health.  Creating zero budget comparisons across program areas would help bring into focus the gaps between revenues and expenses and would become the groundwork for a facilitated discussion about program priorities and where your agency is appropriately investing, over-investing and under-investing in programs that help the organization meet its social goals and objectives.

Think About Governance:  Another part of the process is to be intentional about governance.  At the most basic level, governance asks the big three questions is a) is it allowable, b) is it approved and c) is it something that will advance your mission?  In more detailed thinking about governance, your board needs to create a process to ensure that the budget process protects donor intent, appropriately allocates expenses and ensure the agency’s fiscal and legal advisors review the budget strategy for accuracy and legality.  Finally the governance component of budget planning requires attention to risk management and contingency planning, to minimize disruption of programs and services should budget projections not be met.

Taken together, these five facets of strategic budget planning suggest a staged process that includes:  a) coming to agreement on a funding model for your agency that serves as the organizer for strategy, b) being clear about the true cost of your services, c) recognizing your resource gaps, and d) creating a strategic resource development plan to address the resource gap.  It is important to recognize that re-engineering an agency’s approach to resource development will take time and the first iteration of a strategic budgeting process will likely yield two working documents.  The first document is the strategic resource development plan is a long-term (3-5 years) that defines how your agency will reshape its approach to growing revenue streams over time.  The second working document is the short-term “compromised” budget to address the coming programmatic year that juggles the anticipated expenses with your projected committed and likely revenues.  However, this initial mixed result of “the  pragmatic” and  “the strategic” will only be a temporary stage as the subsequent iterations of the strategic budget process will be oriented more and more toward the strategic goals and objectives of your plan.

What is becoming clear in the social service sector of today is that that nonprofit organizations can’t simply rely on the momentum of the past.  Strategic thinking and systems thinking need to be core competencies of the leadership and boards of nonprofit organizations.  Even as I write this blog, a new resource came through a “tweet” that made this statement, “Leaders who are determined to have their organizations thrive in these new and challenging times must reevaluate their potentially outdated ways of thinking, prioritizing, investing, and acting. (external link)”  For budget planning and the larger concept of strategic resource planning, I could not agree more.

As always your thoughts are welcome.

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