Dynamic Budgeting in Uncertain Times
By: Joanne Sammer
The past few years have not been easy for associations. Uncertain revenue streams and declining membership make all elements of association management a challenge, particularly budgeting.
Not surprisingly, many associations have begun to revamp their budgeting processes to ensure that the budget not only reflects and supports the organization's strategic plan but also remains a dynamic tool to manage in uncertain times. After all, no one knows what will happen three, six, or 11 months from now, but those developments could have a tremendous impact on the budget and an organization's overall financial health.
"In today's environment, the budget needs to be a living, breathing document that is clearly linked to strategic objectives," says John Courtney, CEO of the American Society for Nutrition (ASN). "It also needs to be monitored and managed in light of the political and economic realities that we are all facing these days."
In other words, an association cannot afford to treat budgeting as a once-a-year activity with little connection to what the organization is trying to accomplish. In fact, associations can get into trouble when they don't make adjustments to their budgets throughout the year. For example, if a key revenue driver, such as conference registrations or membership dues, is lower than expected, the organization will quickly run into problems if it does not adjust its budgets quickly.
In this case, the organization could make changes to its budgets to allow for additional membership drives or to reduce expenditures on the conference in order to keep costs in line with expected revenue. If the organization does not make those types of adjustments, it could find itself in financial trouble later in the year when revenue and expenses become further skewed.
"If things don't play out as planned, associations need to discuss the situation with the different departments to see where they can share some money or increase revenue to make up for any shortfall," says Jamie Saylor, managing director and executive vice president of Veris Consulting, Inc.
The dynamic nature of association finances highlights the need for this type of involvement from leaders throughout the organization in the budgeting process. "An inclusive budget process involves not just the CFO," says Saylor. "It also includes department heads and decision makers."
If the chief financial officer generally acts alone in setting budgets from the top down, those allocations are unlikely to reflect the unique issues each department faces. "The CFO doesn't have context to do it alone," says Saylor. For example, if the CFO projects $5 million in revenue from the association's annual conference, he or she may be missing the nuances that influence the amount of revenue the conference generates from year to year, such as the popularity of the location and the existence of competing conferences occurring around the same time.
The Healthcare Businesswomen's Association has developed a monthly dashboard for its board of directors so board members can see where the association's finances stand. As a result, "they keep much closer tabs on what is happening," says Yvonne D'Amelio, HBA's chief operating officer. However, rather than obtaining input from all 17 voting board members, the board makes a six-member executive committee accountable for budget-related decision making. "This helps streamline the process and leads to quicker decision making and easier communication," says D'Amelio.
Staff leaders receive quarterly updates on association performance against budget. D'Amelio has developed templates to support functional groups, volunteers, and membership in any budget-related input they provide. "We provide each individual with relevant dashboard information and tailor those templates and the training we provide by using language that pertains to the work of each individual," she says.
This type of staff involvement in developing the budget can also help to solidify the tie between the association's strategic priorities and individual and department performance. "When you have important decision makers and department heads involved in the budgeting process, these people understand every piece that goes into that budget," says Saylor. "More importantly, when they start to see monthly or quarterly reports or projections, they understand what they are being measured against and why."
Courtney seconds the idea of using the budget to drive individual and department results. "The budget can help people to identify how they fit into the scheme of what the organization is trying to accomplish and how their own activities lead to success of the organization," he says. To reinforce that, ASN discusses strategy with each staff member to reinforce how "the specific activities they are working on support the strategies and objectives and why they are important," says Courtney.
The budget, of course, is merely a tool to help associations achieve their strategic plans and objectives. It is not an end in itself. To create an effective budget tool, association leaders need to involve key decision makers throughout the organization. The American Physical Therapy Association begins the budgeting process after it has developed a strategic plan and set priorities for the year.
"Our board and senior staff use the plan and the priorities to create budgeting rules and guidelines for the staff," says Rob Batarla, APTA's vice president of finance and CFO. For example, the guidelines might indicate increases of 5 to 10 percent for the highest-priority items, while guidelines for lower-priority items might have a smaller increase of, say, 3 to 5 percent or even a reduction of 3 or 4 percent. The guidelines include strategic priorities, a range for potential revenue increases, and a range for adjusting expenses.
"I was concerned that this would be constraining to people, that we would be seen as heavy handed by telling them that you can only change your budgets so much," says Batarla. However, "it has been a great tool for helping people to understand what they are doing with the budget and, more importantly, why they are doing it. It shows them how they fit into the overall budget."
"These guidelines are particularly helpful to staff and volunteers involved in the budgeting process who do not necessarily have a background in finance," says Batarla. "These guidelines make the process more understandable and less scary." Even APTA's directors, many of whom have experience with budgeting, have reported that these guidelines have been helpful.
So what happens when revenue expectations are greater than actual revenue? "Associations are better off when they budget based on their best-case scenario, then develop contingency budgets for lower performance," says Saylor. He says that some associations develop contingency budgets based on four different factors that may affect revenue. For example, if conference registration and sponsorship are down by 10 to 15 percent, an association could have a contingency budget ready to go into effect.
The National Fluid Power Association has a well-developed reserve policy built into its budget process that requires keeping a certain amount of money in a reserve fund for a "rainy day." "We used this during the downturn to help the organization over that hump," says NFPA CEO Eric Lanke, CAE.
Having this reserve fund in place also allows the board of directors to monitor the health of the organization at a high level and to concentrate on making strategic decisions about where to invest resources and focus programs.
"As long as the board sees that expenditures and strategy are aligned and that overall expenditures are preserving the reserve fund, they are doing their fiduciary duty to the organization without having to micromanage the process," says Lanke. "This structure also creates a good deal of trust because it provides the board with a certain comfort level and gives me the flexibility to make the day-to-day decisions about where to spend money on certain programs." If the NFPA runs a surplus or a shortfall, Lanke reevaluates programs and makes recommendations for adding or cutting based on the organization's strategic objectives.
Batarla has a similar role at APTA in budget-related contingency planning. If there is a shortfall, Batarla, the board, and other leaders look for funds that can be moved around without sacrificing the integrity of the organization's strategic priorities. "Things come up that are unplanned and not in the budget," says Batarla. "We have a philosophical discussion with the board and senior management about how to reallocate money. My job is to show the financial impact of these decisions and their impact on balancing the budget."
Other associations look at the budget as a portfolio that occasionally needs to be tweaked. "We handle our budget in way that is very similar to how we handle our investment portfolio, by reallocating and adjusting as needed," says Courtney. ASN has quarterly checkpoints to see how the organization is performing compared to its budget and to gauge how the external environment has changed. "This way, we can make an expense adjustment here or increase revenue there," he says. "We start off the year with our best guess and then continually monitor that and make adjustments as needed."
Guiding Decision Making
Finally, the budgeting process can also help to guide decision making. Associated General Contractors of America (AGCA) uses a matrix approach to evaluate budget decisions. Each department creates a matrix listing all of its major programs and services along with a financial analysis of program costs, revenue, and importance to members. With that information, staff and board members rate those programs on a scale of 1 to 3, from most to least important, with an equal number of each rating. For example, if a department has six major programs, the matrix must have two 1 ratings, two 2 ratings, and two 3 ratings. This forces staff to differentiate among the programs, rather than allowing them to rate everything highly.
"We present the ranking result to the board and review all programs that are ranked 3 so that we can decide whether we want to invest in the program to improve its importance or eliminate the program altogether," says AGCA CFO Monique Valentine. "We also consider whether we can deliver that product or service at a reduced cost." For example, using this process, AGCA replaced face-to-face committee meetings with conference calls and webinars, which are much less expensive to run.
"We do this every three or four years, not only for member programs and services but also for back-office functions, including information technology, finance, and member services," Valentine says.
Joanne Sammer is a freelance writer in Brielle, New Jersey. Email: email@example.com
Sidebar: Six Steps to Better Budgeting
The art and science of budgeting defies hard-and-fast rules for all associations, but taking these six steps will ensure that your budget is built on a solid foundation.
- Develop a strategic plan before you develop a budget. "We used to budget before developing a strategy, but things are now in their proper order," says Yvonne D'Amelio, chief operating officer of the Healthcare Businesswomen's Association. "Once you have a strategic plan in place, the annual budget is a lot simpler to develop."
- Provide tools to help nonfinancial staff, volunteers, and board members. For those outside the finance department, be clear about their roles in the budgeting process.
- Communicate about the budget process. Poor communication between finance and the rest of the organization can demolish trust. Finance staff should not assume that staff leaders, volunteers, and board members are not financially savvy.
- Create an open and transparent process for developing a budget. If everyone understands what you are doing and why, they are more likely to support the process and the resulting budget.
- Find a budgeting approach that fits the organization. Whether using historical budget benchmarks, last year's numbers, or zero to start the budgeting process, make sure the approach is aligned with the organization's needs and capabilities.
- Determine how much leeway everyone has to manage their budgets. Some associations require staff to adhere to specific numbers for each line item. Others require staff to manage only their own bottom lines, with freedom to move money around in their budgets as needed.