Your personal health and your organization’s financial health are the same in at least one way — serious problems could exist that you cannot see or feel. A sudden loss of income or an unexpected expense can stop the heart of your organization just like a medical crisis can stop your body. For your organization, like your body, monitoring a few key areas can alert you to problems on the horizon.
At a minimum, organizations should monitor financial health in these three essential areas:
- Actual vs. Expected Financial Activity
Financial performance information should be compared to planned, or budgeted, performance to determine how actual events compare to what you thought would happen. Focus on variances in significant income and expense categories. Obtain explanations for why the budget or plan was not met. Did conditions change? Were projections unrealistic? Focus on “why” and use that information to refine budgets and plans.
- Cash Flow
Project your cash inflows and outflows for at least three months, preferably for six or more. Assess whether income that you expect to take in is going to cover the amounts you need to pay. Sounds easy, but this analysis takes some thought and effort. You need to know your payments receivable and payable, regular payments that are required no matter what, such as payroll and rent, and your reconciled bank account balances. Be realistic about payment timing and what it really costs to sustain your organization.
Maintaining control over spending is the most important and most difficult part of running an organization. Demands to fund day-to-day operations, in addition to investing in technology and infrastructure, are constant. Prioritizing essential expenses and growth investments is a challenge that requires regular attention. This is particularly true in newer organizations where infrastructure investments are most crucial.
Maintaining your organization’s health is a lot like managing your personal health. Monitoring a few key health areas can alert you to problems on the horizon, and give you an opportunity to act before it’s too late.
When you’re going to a new destination, you use a navigation app like Waze. Your financial goals are just like that new destination – you’re not quite sure how to get there. So how can you navigate towards achieving your financial goals? You set-up and follow a budget. Your budget is your Waze App (a.k.a. Road Map for most over 50) to finding your organization’s financial destination (a.k.a. your goals).
A budget navigates your organization toward achieving Three Financial Goals:
- Immediate Needs
Identify the amount of income and expenses that you expect to receive and pay out for the year to operate your organization. Build the budget line-by-line, carefully considering the reliability, amount, and timing of each item. Start with income and expenses for which a contract or agreement is in place. Include other items based on their likelihood to occur and your organization’s track record. Be realistic and document any assumptions that you make.
Beyond the day-to-day operations, you need to invest to keep up with technology or replace equipment that has reached the end of its useful life. Assess the condition of your vehicles, computers, and other property that you depend on to manage your operations, data, and communications. Determine what needs to be replaced, when, and the cost. Any replacements that don’t fit into the current year’s budget should be included next year, or in the future.
- Future Growth
Growing your market, programs, or services takes money. Budgeting is a thoughtful process that helps you plan for growth and funding. Budget time is when you assess your current financial scenario and previous track record, and plan your future. It’s the perfect time to weigh the costs and benefits of growing, and determine how to fund those costs. If those costs exceed what you can fund yourself, does borrowing or bringing on an investor make sense?
You wouldn’t drive to a new destination without a navigation app. Why would you navigate your organization toward its financial goals without a budget? Developing a budget and using it as a navigation tool will help your organization stay on track to achieving financial goals for immediate needs, infrastructure, and future growth.
Every year, your organization puts together a budget. Then what happens with it? If you’re not using your budget to manage your organization, you’re missing out on a powerful tool to help achieve your goals.
Leveraging the power of your budget starts with deciding what information to collect and track to monitor progress toward achieving specific objectives. Next, you need to make decisions about managing and reporting information, otherwise known as the financial statements.
That’s a lot of setting up and deciding to do before you’ve got a powerful management tool. So where do you start?
Manage your Organization with your Budget by performing these three actions:
- Set Performance Parameters
Establish a formal financial oversight process to stress its importance and to set clear information requirements, actions, and time frames. Ensure that all responsible parties are aware of obligations, accountabilities, expectations, and authorized activities. Define expected financial outcomes related to strategic and operational goals. Ensure that financial reports address progress toward meeting those goals.
- Identify Critical Areas
It’s not necessary to review every financial line item. Only significant items that relate to performance results should be assessed to get to the root cause of variances or unexpected results. Explaining the root cause often helps you identify the corrective action that is needed to stay on course and meet budget and operational goals. Common financial assessments include variance analysis of planned vs. actual performance for significant line items and ratio analysis to assess financial health (e.g., liquidity and debt).
- Focus on Objectives
Stay laser focused on progress in meeting your short, medium, and long term objectives. Documenting the review and resulting decisions and actions help to track progress throughout the year. Promote discussion about balancing the organization’s immediate and mid-term needs with long-term goals. Think beyond the day-to-day. Needs too large to fund from current operations require decisions about postponing or incurring debt.
Leveraging the power of your budget by performing these three actions will help you Manage your Organization, and achieve your strategic, financial and operational goals.