Financial planning that drives your strategy forwardby Allen J. Proctor | August 2014
The nonprofit sector doesn’t attract as many financially-minded professionals as, say, the business sector—and that often includes the people responsible for the finances: your board members. In this guide, adapted from his book Linking Mission to Money, nonprofit finance guru Allen Proctor explains for non-experts what a financial plan does, why it’s critical to tie it to the strategic plan, and how board and staff leadership can work together to build a strong, mission-focused budget.
Finances play a major role in giving leaders confidence that the nonprofit can sustain its mission through thick and thin. But finances are not an end in themselves—they are simply the means to an end. Imagine the organization is an automobile and the leadership is the driver. Mission and community need represent the steering wheel, determining the path the organization will take. Finance—and all the jargon and budget-balancing hype it brings—represents the brake and accelerator pedals, determining how fast the organization travels along that path. The first focus should be the steering wheel; that is, how the nonprofit intends to meet the needs of the community.
Strategic planning is the tool most nonprofits use to “steer.” Strategic plans are important and often many hours are spent in dedicated meetings putting together a good and coherent plan. These plans can create a tremendous forward-moving energy. Once completed, though, it is a leadership’s responsibility to make sure the strategic plan does not sit on the shelf. Use the plan as a fundamental component of subsequent board meetings, budget deliberations, and performance reviews.
To ensure a strategic plan comes to fruition, link it with a financial plan. A useful financial plan should include a minimum of three years: the current year, the year for which one is making decision (ideally as part of budget process), and the following year. Additional years can be valuable for planning fundraising or physical expansions. Remember, the major value of a financial plan is to show the implications of decisions, so don’t hesitate to use a financial plan to promote good “what if” discussions of alternative ways to fulfill mission.
The financial plan links mission with the reality of the resources available. The annual budget is the first implementation step of a multi-year financial plan.
Building a budget that links mission to money
A good budget links the mission to how money is spent and to the evolving needs of the community. Throughout the course of the year, nonprofit leaders must understand that a budget is a story that happens to have numbers associated with it. It is a story that tells what your nonprofit is doing this year in order to move ahead on that path. Focus less on the approach and more on the purpose—the story—of the budget. And tell that story as often as possible: to staff, donors, funders, and the community.
A good budget links the mission to how money is spent and to the evolving needs of the community.
We are often misled by our use of the term “nonprofit.” It is a misnomer. Nonprofits need profits in order to survive, no differently than any business. How to use those profits is what distinguishes nonprofits from for-profits. Unfortunately, too many nonprofit leaders ignore this need for profitability by allowing their organization to be unprofitable over time (a structural deficit).
Wise nonprofits are profitable and use those profits to build reserves to improve and maintain services, to try innovative approaches, and to sustain services through recession and crisis. And sustaining and stabilizing services through those difficult times will almost always call for using those reserves to finance an operating deficit. Too many nonprofit leaders are not mindful of this need for stabilizing service and instead insist that a nonprofit balance its budget during a recession or other financial crisis.
At the same time, the search for sustainability is rarely advanced by playing it safe or being “conservative” in approaching budgets. Well-intended efforts to be conservative can often lead to unintended consequences that actually increase risk and the nonprofit’s vulnerability to recession. Always test any “conservative” proposal for how it will impact your nonprofit’s ability to serve the community’s needs today as well as through economic recession and recovery.
Creating a budget-within-a-plan
The most important role board leadership can play in the budget preparation process is to insist that the budget be firmly grounded in the agreed-upon strategic vision and financial plan. Firm grounding means that the budget has specific goals and objectives to advance the strategic plan, and that each goal and objective has specific progress milestones that can be reviewed at every board meeting.
Too many budget processes are short-sighted, one-year-at-a-time exercises to balance revenues and expenditures. In periods of fiscal stress or economic uncertainty, a budget process with a one-year horizon makes it easy to postpone difficult strategic decisions in the hope that things will get better in the next year or so. It is important to resist this.
The primary goal of the budget should be to make it the first implementation step of the multi-year financial plan. This approach will force the budget decision-making process beyond the limits of a short-term, largely budget-balancing exercise while at the same time providing board and the staff with an objective and tangible way to conduct budget deliberations in the broader context of community need and service sustainability.
This budget-within-a-plan approach is the best mechanism available to evaluate the impact of current-year budget decisions and the organization’s long-term ability to sustain its mission. Only by preparing a budget that represents the “first year” of the financial plan can budget decisions will be routinely placed within the context of long-term strategy and mission.
Allen J. Proctor is an author, columnist, speaker, and consultant, with 30 years of experience evaluating the financial health of organizations, developing effective business strategies, and enhancing organizational effectiveness.