Budgeting

Part of planning for next year is to create a budget. Budgeting is a forward-looking process.

The past can be helpful when creating a budget. However, the examination of the past should only be done as a learning exercise. The backward look should be used to answer the question, "What mistakes did we make last year when we created the budget?"

Sometimes nonprofit budget committees are tempted to use their time to examine operational issues and attempt to use their financial expertise and experience to solve operational problems. While it grows out of a desire to be helpful, it unnecessarily lengthens the time required to create a budget. It also implies that the staff is unable to handle the operational needs of the organization. In addition, focusing on last year usually results in a budget that anticipates a repeat of last year's business conditions rather than preparing for the upcoming challenges.

There are three reasons that budgets fail to produce the expected results.

Inexperience - The individuals who created the budget were overly optimistic when setting expense or revenue goals. Insufficient time was spent in the planning process before the budgeting started. The budget lacked the flexibility necessary. The expected performance exceeds the skills of the staff. That is an example of one form of optimistic budgeting rather than an indicator of inadequate staff skills. Time, experience, and training will improve the staff skills.

Business Model - The current business model is out-of-sync with the current market conditions. A history of failing to make the revenue and expense projections implies there may be a need to adjust the business model. However, it is generally a bad idea to attempt to make the adjustments to the business model during the budget process.

Inattention - The individuals responsible for carrying out the budget failed to monitor their own activities closely, report problems in a timely manner, or recognize the impact some of their decision would have.

Regardless of the reason for the budget failure, the budget committee's job is to create a plan for the coming year rather than attempt to solve last year's problem. The solving of last year's problem (better education and training, adjusting the business model, or improving the monitoring and reporting process) should occur separate from the budget committee's work.

Next Step:

Limit the work of the budget committee to creating a plan for next year (forward looking)

Separate from the budget committee, determine why last year's results were below expectations

Develop a plan to address the reason last year's performance was below expectations

Sustainability improves when the budget is followed. Sustainability also improves when the failure to meet last year's budget expectations is used as an education opportunity. Using the budgeting process to address operational issues lowers sustainability, limits the organization's opportunity to learn, and fails to properly prepare the organization to meet the challenges in next year.

When do you plan to train your budget committee to guide your organization's future?