A Successful Year Starts with a Solid Budget
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By Bill Monn, Vice President of Client Contracting

A solid budget is the confluence of science and art that serves as the compass for the financial oversight of successful organizations. A budget built on your organization’s track record provides timely and accurate guidance and a solid base to build your plan for the future.

Conversely, the old saying that a failure to plan is a plan to fail continues to ring true. Those organizations that expend little effort in building a solid budget run a high risk of missing trends that could be harmful or not seeing opportunities to build on.

Getting started

The three major metrics you should consider are revenues, expenses and margin. Start your budget planning by thoroughly understanding where you are. Where are your revenues, expenses and margin relative to what you planned for in the current year? Look at them together as well as individually. A spike in expenses is not necessarily a bad thing if there has been a corresponding spike equal or greater in revenues. Review variances from your budget. If attendance is lower than projected for monthly events, understand why. Is it program content? Cost? Location? Time of day?

Once you have a good feeling of where you are, take the time to understand where you’ve been. Two points on a chart are a direction, three are a trend. Go back at least three years – four is better – and graph your revenues, expenses and margin. You can do this for every event or every element of your organization, but at the very least roll up the overall numbers. Look at the variances on the chart and they will show maximum and minimum boundaries for budgeting purposes. In the absence of any major changes (adding or eliminating an event, for example) the science of budgeting tells you that next year’s budget should be within this range. The art of budgeting will guide you on projecting in a more aggressive or conservative vein.

The simple trending graph below suggests that revenues for the coming year will fall between $109 and $122. If you budget higher or lower, it should be with accompanying rationale.

year end revenue

It’s a group activity

Building a budget should not be left solely to one or two people. The members who elected you to the board are banking on you being fully engaged and involved in how the organization is spending its members’ money. Good healthy discussion is beneficial. Vibrant organizations often have more ideas than can actually fit in the budget.

We’ve observed a number of pitfalls to watch out for during the budgeting process. Be alert to these.

  • Cutting and pasting last year’s budget into the new year. This approach often misses trends or fails to capitalize on opportunities. If attendance at monthly events was down 50 percent in the first half of the year and up 50 percent in the second half of the year, then just rolling over last year’s budget numbers into the new year could miss a big opportunity. Even worse is a trend where attendance is falling. Or, if your numbers are significantly underperforming in your current budget, why would you roll those numbers over into the new year?
  • Calculating where the organization will likely finish the current year and projecting those numbers into the new year. Although this is less risky than rolling over the previous year’s budget as described above, it also runs the risk of not appreciating trends and doesn’t draw on the trending analysis of the past three (we still like four) years.
  • Saying that budgeting is not the job of the whole board. On the contrary – it is the job of everyone on the board to invest the time and effort to build a budget that brings value to the organization’s members. Leaving the budget process entirely up to the president or a treasurer is not good governance. Organizations should involve their committees. Some of the best structures ask committee chairs to come forward with a budget for the board to review. Who will know better why attendance at monthly meetings was down 50 percent in the first half of the year but up 50 percent in the second half of the year than the chair of the education programming committee?

What about reserves?

A topic deserving an entire a column on its own, we recommend that our clients maintain cash reserves equal to 1-2 years of operational expenses as the sweet spot for most organizations. If your organization has well established programs that are producing consistent results (the trend band referenced above is narrow) then less reserves are required to accurately project a budget. If an organization has more variables in its budget (a major revenue source is grants, for example) then a hedge toward greater reserves is recommended.

Closing thought

Your budget should not be a once-a-year exercise that you do in the fall and then tuck away for the year. Said another way: Do you know everything that’s going to happen in the next 12 months when you adopt a budget? A monthly review of your organization’s financials is terrific discipline to gauge how you are performing compared to your plan. High performing organizations do periodic reviews and reallocate as appropriate. So if your monthly meetings are drawing 50 percent more attendance in the first half of the year than projected, your organization has the opportunity to capture those excess funds in real time and fund a program or initiative in the second half of the year rather than just letting the extra money sit until the end of the year. You don’t have to spend it – but you can.

Bill Monn is vice president of client contracting at Ewald Consulting. Prior to joining Ewald, he spent 15 years at Pillsbury/General Mills managing a business unit. Ewald Consulting is the largest association management company in Minnesota and also has offices in the Chicago area.

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