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.
Nonprofit Boards have a big job. One of the biggest parts of that job is fiduciary responsibility — making sure that the organization is funded, and that funds go to supporting the mission. Reviewing organization’s financial condition is one way that Boards fulfill their fiduciary responsibility.
How do Boards review the organization’s financial condition? It all starts with receiving and reviewing periodic financial statements, and analyzing financial performance in relation to the budget and financial ratios.
Nonprofit Boards should monitor financial performance and take action in four areas:
- Budget vs. Actual Performance
The year-to-date budget should be compared to actual performance. Analyze variances between budget and actual performance, especially for key income and program or administrative expense categories. Identify why variance from plan are occurring for significant differences and line items.
Periodically assess four financial ratios to identify trends and their impact on fundraising and other plans:
- Days Cash on Hand – days of operation with no funds received and no investments liquidated
- Days Cash and Investments on Hand – days of operation after liquidating investments and before borrowing funds
- Current Ratio – divide current assets by current liabilities to assess overall financial health
- Debt Ratio – divide total liabilities by total unrestricted net assets to assess the need to reduce leverage
- Fund Raising
Assess the potential for overreliance on one individual funding source, indicating the need to diversify. Benchmark fundraising expenses in relation to funds raised against Charity Navigator or another metric to determine the return-on-investment of individual fund raising events and activities.
- Program Expenses
Measuring the relationship of each program’s expenses to overall expenses helps the Board to prioritize their attention on programs where more organizational resources are invested.
Nonprofit Boards fulfill fiduciary responsibility by monitoring the organization’s financial condition and making prudent decisions to maintain financial stewardship. By focusing on the four financial areas above, Boards can assess and act appropriately on financial performance.
Last week, a Tweet I saw really grabbed me – “Underinvesting is expensive! Starving nonprofits leads to inefficient systems.” It was from The Bridgespan Group, a global nonprofit that helps other nonprofits in the hard work of developing strategies.
Working with less means you get less.
For some reason, non-profits are expected to run on a shoestring. Starving nonprofits limits investments in the necessary people and systems to perform effectively.
GuideStar USA, Inc., used the nonprofit data they collect and report to form a business case to help break the “overhead myth” about limiting overhead costs. They offered steps to debunk the myth and shift the conversation from overhead to the need to invest in people and systems.
Five Steps to Debunk the “Overhead Myth”:
- Clearly document objectives and the intended impact of meeting those objectives. This informs donors about your mission and community, and sets the framework for measuring impact.
- Describe the strategies employed to achieve stated objectives and impacts. Donors are more inclined to support nonprofits that connect strategic goals with action plans and expected results.
- Discuss the capacity to deliver the programs and services to meet stated objectives. Describe capacity investments needed to establish and sustain the necessary infrastructure to support programs.
- Tell donors how you measure progress. This communicates that you are monitoring the achievement of your organization’s goals and helps donors trace the impact of their gift.
- Share results from recent work and describe additional results that you want to achieve. Highlighting successful projects illustrates how goals are achieved and helps donors visualize their gift in action.
Charting your non-profit’s objectives and impact, and the investment needed to deliver effective programs debunks the overhead myth. Helping donors understand infrastructure needs will compel them to give.
More tools and information to help non-profits to re-direct donor conversations from the “overhead myth” to performance and results are found at www.overheadmyth.com.
A few weeks ago, I blogged about nonprofit Board duties required to fulfill the financial stewardship and oversight role. This legally-defined role is known as “Fiduciary Responsibility.” This week, I provide more details about the Board Treasurer’s important financial oversight role.
The Treasurer is the primary financial officer of the organization. As such, she or he should have the experience and background to be knowledgeable about financial policies and functions necessary effectively manage and understand nonprofit finances. Some professions that make good Board Treasurers were described in another previous blog post.
Four important Treasurer Duties and Responsibilities are to:
- Assure that the organization is following appropriate financial policies and that qualified individuals perform financial functions. The right policies and people are more likely to provide the desired results, such as reliable and complete financial information.
- Understand regulatory and legal requirements for financial accounting and standards of practice for nonprofit organizations and assist other Board members in understanding and fulfilling their oversight and fiduciary responsibilities.
- Assure that accurate financial records are being kept, monitored, and used to take necessary action to sustain and protect the organization’s finances. Regularly provide the Board Chair and the Board with an accounting of the organization’s financial condition.
- Assist in preparing the annual budget and presenting the budget to the Board for approval, and in selecting an independent auditor, reviewing the annual audit results, and answering Board members’ questions about the audit.
Nonprofits with Treasurers who fulfill these four fiduciary duties are more likely to make appropriate financial decisions, meet donor expectations to protect and preserve financial assets, and ensure that regulatory and legal requirements are addressed.