Unique Challenges of Budgeting in Not for Profit

Budgets matter in the not-for-profit world to a degree I rarely see in the for-profit world. In the for-profit world, the budget is just a snapshot in time. It can be forgotten about the first time the company produces a reforecast (which, incidentally, can be forgotten with the second reforecast). It’s not that for-profit organizations are wrong to put less credence in the budget than non-profit organizations, it’s just that they operate in different worlds.

Not-for-profit organizations live and die by their budgets. Most of them don’t have a cash cushion to absorb any unplanned increase in spending. And with the level of donor scrutiny these days (especially around the ratio of total expenses spent on charitable programs vs fundraising and overhead) they can’t afford to be wrong. Not-for-profits often derive their revenue from low margin programs and events; and from limited donor appeals. There’s simply not the same opportunity to go out and generate revenue that so many for-profit companies enjoy.

And last but not least, budgets really matter in not-for-profit because they are a way of making the least financially oriented people fiscally responsible. Many not-for-profit program managers don’t have business training. That’s hardly a criticism. Many of them are making contributions to the world that will impact generations. The fact that they can’t recognize a credit from a debit doesn’t matter.

So budgets are deployed as a basic but effective tool to help communicate “stay within these boundaries” to program managers. They get that, even without an MBA.

With all that being said, budgets are mission critical for not-for-profits. I don’t think anyone would argue with that. The question then is what’s required to facilitate an effective budget process?

The Baptist General Convention of Texas was the first non-profit I worked with as a client of XLerant (back in the early days when my partner and I did all client implementations of our budgeting solution). Jill Larsen, the CFO of BGCT taught me more about not-for-profits than could ever fit on this post. But let me highlight a few of the observations she shared with me here:

  • Since many program managers do not have a business background, they are not nearly as familiar with Excel as people in the Finance organization are.
  • Program managers find the budget process stressful and intimidating. Being sensitive to that is vital to serving them and creating an effective budget process.
  • Program managers would much rather work with something that looks and feels more like, say TurboTax, than a spreadsheet.
  • Program managers don’t think like accountants, especially when it comes to budgeting. Unlike accountants (who tend to think strictly in terms of G/L accounts and amounts) program managers think in terms of the programs or events they’ll be running, and the resources required to make them happen.
  • Taking to heart all the observations listed above, the budget process needs to reflect programs, events, projects and initiatives – all developed by the program managers who will be delivering them through the year.

As I mentioned, I learned a lot from Jill (in fact we all continue to learn from her). If you’d like to read a case study about the Baptist General Convention of Texas, which can provide further insight, you can access it here.

 

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