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Associations Now

A Financial Balancing Act

ASSOCIATIONS NOW, July 2012 Small scale

By: A. Michael Gellman

Summary: What to consider when looking at your short- and long-term financial strategy.

Almost any association CFO will tell you this about association budgeting: Balancing mission, resources, and financial sustainability are mathematically impossible in the short run, but it can be done if you take a long-term perspective. I remind myself of this every time I help an organization, including a small-staff one, begin the process of assembling next year's budget.

There are so many factors to consider while building a budget: mission relevance, strategic positioning, critical partnerships, service to constituents and members, fulfilling donor intent, meeting sponsor expectations, and generating public awareness, to name a few. And while it's tempting to use budget comparisons and financial reports as measures of success or failure, this is difficult when there are no simple equations for evaluating these factors.

Financial reports are prepared monthly, budgets are endlessly discussed and used as a built-in measure of success, and we all watch anxiously each month as our organizations' bank and investment accounts drift lower during tough economic times.

However, you can hang your hat on a few simple truths. First, you will build a budget for the next fiscal year annually. Second, your organization will generate monthly financial reports and track its financial progress. Third, you will argue about the level of financial success or failure depending on individual points of view. All three of these truths are part of a healthy process to balance mission, resources, and sustainability.

Remember this is a fluid process. Every organization wants to do more, stabilize funding sources, and increase net assets, but it's hard to do all three consistently over time. Each day you must choose among these three factors, favoring one over the other as circumstances dictate.

So what is the solution? During the budget-building process, you must agree to give equal consideration to a program's connection to mission, the availability and reliability of resources, and the program's impact on net assets in the future to see if the effort is sustainable.

In most cases, you will focus on mission first, considering what programs and activities are needed to support the mission and the direction the board has set for the organization. Then consider resources to fund these programs and activities. Resources come from one of two broad sources: current revenue and support (contributions, membership dues, registrations, grants) or the balance sheet and operating reserves (bank and investment accounts, accounts payable, and lines of credit).

If funds needed to support programs and activities are coming in at the same pace or faster than you are spending them, you will find your organization in a sustainable situation, and the impact on your association's financial health will be either a balanced budget or growing net assets.

However, organizations often find themselves building budgets for next year that include increased expenditures for programs, staffing, and support services, while revenue and support are static or declining. Although an organization might be able to sustain deficit spending in the short run, it is not sustainable over the long term, especially if the organization has not built up substantial operating reserves.

Every day association leaders are confronted with tough decisions that temporarily force them to favor one factor over another. One day you may have to move quickly to better align community needs with your mission, even if current revenue and support are not available. You are forced to spend out of operating reserves or, worse, borrow funds. This is not sustainable for long.

In another case, you may struggle to develop meaningful programs, even though funding is present. Although balance sheet assets will grow if you are not spending money on programs, this model also is not sustainable, as funders and donors will become disillusioned and stop supporting the organization.

This is why mission, resources, and sustainability are critical factors—and balance among them ensures financial and organizational health in the long term. Keeping your eyes on this balancing act will allow you to make the best decisions possible. In the end, we need to find the most mission-based activities to support that can be sustained.

A. Michael Gellman, CPA, is a shareholder with Rubino & McGeehin CPAs and Consultants, where he manages the Consulting Services Group. Email: mgellman@rubino.com

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