Budgeting! It is one of the most dreaded times of the year for many organizations. Operating departments often believe they are committing to a set-in-stone plan that requires perfect foresight. Accounting either needs to spend weeks or months managing the entire process (centralized) or aggregating individual department budgets (decentralized). Controllers and CFOs lament the lack of cost-effective and efficient budgeting tools that easily integrate with general ledgers, thereby reverting to manual spreadsheets. CEOs frequently request repeated revisions, restarting the entire process each time.
Why go through the effort when a budget is obsolete at the moment of issuance? Couldn’t all of this employee and executive time be redirected to achieving the entity’s goals rather than defining the entity’s utopia?
But, budgeting serves many purposes beyond financial prognostication.
The most common reason to budget is to measure performance versus expectations. In a simple example, budgeting helps a nonprofit gauge the success of its annual gala by comparing what was actually raised versus the amount anticipated. In annual budgeting, this concept is applied to all revenues and expenses, and important lessons are learned by analyzing variances that compare actual results with budgeted amounts.
Another compelling reason for budgeting is to determine the adequacy of an organization’s resources to achieve its goals. Nonprofits are especially prone to broadening service offerings, driven by relentless client needs and desires to help. Can the overnight shelter also provide a dinner meal? Budgeting analyzes if an organization’s finite resources can support broader services.
Budgeting also helps leadership make more informed choices about service offerings. Should the overnight shelter offer breakfast instead of dinner? Or would it be more helpful to offer a clothing bank so clients can stay warm or be more likely to get a job interview. Budgeting guides decisions by focusing minds on the resources, both existing and yet-to-be generated, and on the costs required to offer new services.
Another reason to budget is to obtain credibility with constituents, funders, and investors. Multi-year budgeting often accompanies an organization’s strategic planning process. A five-year budgeting roadmap is not intended to determine the exact route but rather demonstrates forward-looking thinking. Evidence of such foresight is often sought by grant makers, banks and even donors that are interested in “investing” in solutions, not merely donating to meet today’s needs.
Doubting the benefits or struggling with budgeting? Talk to us!
Jane Repensek, CPA, MBA
Consultant