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No
Holds Barred Budgeting
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By
Robert Soares, CPA
Singer Lewak Greenbaum & Goldstein, LLP NO HOLDS BARRED! I'm sure most of you have heard the expression. It's a wrestling term that basically gives each wrestler the green light to use any and all techniques in his arsenal to win the match. Never before has a term so perfectly fit the mentality that is required in the creation of a meaningful budget for an Organization. The budget process has historically been regarded as a burdensome task that must be undertaken to produce a product for which noncompliance with its contents will be met with criticism at best and termination at worst. To say that this is traditionally an unappreciated process would be an act of charity. Truth be known, the process has been played out on an uneven field, using the wrong ball and following a set of outdated rules that serve no apparent purpose. The time has come to reinvent the game starting with nothing more than the spirit in which it was meant. It is likely that when this undertaking is complete we will be left with a new process that looks very much like the old one, but I assure you, if done properly, only those steps that make the most sense and provide the most benefit will survive. We will then be left with a stronger, more effective and more efficient process by which budgets will be prepared. Spirit of the Budget A budget should be a planning tool utilized by an Organization to achieve its stated mission. To better understand this statement, let's break it down to its component parts. First of all, a budget is a tool used in planning. This means that it is an object used prior to the undertaking of a task that is designed to facilitate the success of this future task. Next it is utilized by the Organization. This means that is must not only be prepared but also reviewed and updated by the Organization. But who is the Organization? It is really every single individual in the Organization and the budget should be prepared and reviewed, at least in part, by everyone in the Organization. The reason no one should be left out of this process will be made clear in the following sentences. Finally, the budget process should assist the Organization in achieving its mission. This mission should be clear and definite, not subject to interpretation and should be communicated and understood by everyone in the Organization who has either a direct of indirect effect on the Organization achieving this mission. The reason this should be everyone as suggested above is that no Organization should have on its payroll an individual who does not contribute either directly or indirectly to the Organization achieving its mission. Think Outside the Box The biggest shortcoming of most budgeting processes is the mentality of the individuals preparing them. They limit themselves by following standard formats, customary measurements and generally accepted assumptions. Understand that budgets are not like the audited financial statements prepared by your independent CPA's. Budgets do not have a governing body dictating what must be included and how it must be formatted. No place does it say that it must apply accounting principals or be based in theories of finance. These are all limitations that are self-inflicted and tremendously limit out budgets and significantly hinder the acceptance of the budget and the budgeting process by members of the Organization. That this is not to say eliminate all of this. At least some version of the budget should exist in a financial statement format that resembles the actual financial statements. This is necessary to allow the Organization to measure actual results against this budget. Additionally, since accounting is the language that explains business, is makes sense for some form of the budget to be written in that language. The key to remember is that this need not be the only version, or even the version that is most commonly used by the Organization. Use a version that makes the most sense to the Organization and best conveys its current and future position on the track of achieving its mission. New Ideas In the budgeting process it is imperative not to discriminate. Every aspect of the Organization is to be included. For example, invite the Board of Directors to include a line item in the budget for benefits to be received from the individuals on the Board and from the collective effort of the Board. The logical budget item would be contributions, but new customers, clients or suppliers are also items that can be budgeted for as a result of the efforts of the Board of Directors. Think about the benefits the Board provides to the Organization and come up with a way to measure and track those benefits and these are your budget items. During the year, at the cooperative meeting to review and update the budget, discuss the variance between the Board of Directors' budgeted amounts and actual results. Make certain that the board is represented at this meeting and that this item is discussed and analyzed in as much detail as any other line item. Be creative and understanding of everyone in the Organization. Since not everyone subject to the budget understands financial statements and accounting, it will undoubtedly be beneficial to include non-financial goals in the budget. These could be items such as the amount of cash in the bank, a calculation of occurrence of the problem that the Organization has been established to correct or total new contributors to the Organization. The possibilities are endless. The key is to tie in the success and achievement of the budget in such a way so those directly responsible for it can relate. Again, remember that there are no rules. Ask what benefit an individual or department brings to the Organization and use the most logical and direct measurement of that item as the item to be budgeted for. A good addition to the budget is ratios and other relationships among various line items. These need not be overly complex; for example, the percentage of general and administrative expenditures to total expenditures is something anyone can understand. It represents the percentage of expenditures the Organization spends just existing without providing the benefit that the Organization is designed to provide. Another is fundraising income divided by fundraising expense, which tells you the amount of money raised for every dollar spent trying to raise money. Keeping trend analysis of these ratios make them much more meaningful as well. It allows the Organization to track positive and negative changes over time and provides for better information when budgeting for the future. Another helpful item to be included with the budget is the preparation of flash report cards. These are ideally the ten items that most define the current position of the Organization in attaining its mission. They should be simple to understand and information should be quick and easy to obtain. They can be financial or non-financial by any logical statistic or measurement. Some good examples are total revenues, total number of members, some measure of public awareness of the Organization or its cause. These items should be updated monthly, weekly or daily, as most helpful to the Organization and compared to the budget to provide the Organization with a quick idea of where the Organization is on its track to achieve its mission. These flash report cards will be the first indicators of short-term obstacles and long-term problems to the Organization meeting its mission and should bring about discussions from the Organization on ways to overcome these obstacles and problems. Word to the Wise Despite all of the above, you should be certain not to put too much into a budget so as to make it overbearing and cumbersome. This will only draw attention away from the budget and as a result from the Organization achieving its goals. Only those line items for which there is a benefit should be included in the budget. (Notice that these items must have a benefit and not just a reason.) All items for which there is no benefit should be eliminated completely and no time wasted on discussing them. Desired Outcomes The major outcome of a budget should be to unite all members of the Organization to one goal: achieving the mission. Only when everyone is on the same page, working as one unit toward this goal, will it actually be attainable. This is why the budgeting process must be a cooperative process. This cooperative process does not mean the accounting department preparing the budget for each department and handing it to them to live by any more than handing each department a blank piece of paper and telling them to come up with a request for the dollar amount they would like to spend in the upcoming year. This cooperative process should be a time when the Organization as a whole comes together to discuss the budget. Logistically speaking, it may require pre-meetings to be held by each department with one representative from this meeting bringing to the Organization meeting the collective ideas from the department. However, the more participants at the Organization meeting, the greater the potential for both arriving at a meaningful budget and having that budget be accepted and adhered to by all members of the Organization. Historically, one of the most significant weaknesses of the budgeting process has been the lack of accountability. The cooperative meeting mentioned above is necessary if accountability with the budget will exist. Even with the cooperative meeting this will be a challenge but without it enforcing accountability will be perceived as nothing more than scapegoating. Actual results attained must be compared with the budget and a detailed analysis prepared. It must be stressed that this process must be an honest assessment aimed at achieving the Organization's goals and not merely direct attacks at certain individuals, programs or departments. It must be one where hierarchy among individuals is minimized. Only when everyone understands his role in ensuring the success of the Organization's mission and feels free to express his opinion on what needs to be done to that end will the process be effective. In this cooperative meeting each individual or department should review actual results against the budget and prepare an explanation of the variance that is accompanied by a suggestion on how to correct it. Keep in mind that whether you are discussing income or expenses, shortages and overruns are equally harmful to the Organization and should be analyzed with equal honesty and attention to detail. The only difference between the harm caused by shortages and the harm caused by overruns is the passage of time until the harm is noticed. For example, if you are reviewing expenses, overruns will cause the Organization to immediately spend resources that it does not have while shortages will prevent the Organization from using resources in such a way as to produce the maximum amount of benefit in the current period. In most cases this reduced production of benefit relates directly to diminished creation of resources in the future. With revenues the terms are reversed but the same holds true. Conclusion If done properly creating a meaningful budget will have tremendous long-term benefits to the Organization. It may just be the catalyst that allows the Organization to reach the next level and beyond. But for it to be so the budgeting process must be a creative process. Don't fall into the trap of using old recycled ideas and methodologies. Use any method, any measurement, any system to display or communicate the budget that intrinsically makes the most sense and provides the most benefit to the Organization. Throw away the old rules, grab the right ball and avoid the holes in the field. Doing otherwise is asking to get hurt. Robert Soares is a manager at Singer Lewak Greenbaum & Goldstein LLP, Certified Public Accountants & Management Consultants. He manages the Los Angeles office's nonprofit services. Founded in 1959, SLGG is now the 59th largest firm in the nation with offices in Los Angeles, Santa Ana and Ontario. Soares can be reached at (310) 477-3924 or by e-mail at rsoares@slgg.com.
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