Last month, Tony Boor, Blackbaud’s Chief Financial Officer & Senior Vice President, Finance & Administration; Jagtar Narula, Blackbaud’s Vice President, Financial Planning & Investment Strategy; and Tom Pate, Blackbaud’s Vice President, SaaS Business Transformation, presented an online seminar regarding the nonprofit budgeting process. If you missed it,  be sure to take some time to watch the presentation!

Here’s the seminar’s summary:

Budgets are the last phase of a longer strategic journey

Budgets are, or should be, more than a record of “what we think we’ll earn, and what we think we’ll spend”. With proper planning and preparation, a budget should be a reflection of the strategic, long-term plans for your organization, and should serve as an annual framework against which your organization can measure financial success and directional movement towards your goals.

For best results, we strongly suggest not simply taking last year’s budget number and adding or subtracting dollars or percentages; rather, utilize a zero-based approach to budgeting.

Each year you should be evaluating your Annual Operating Plan, reviewing metrics and benchmarks, and determining the ratios and drivers you will use to determine the most effective areas to which to allocate your resources and capital to achieve the optimal return on investment. Remember to align your metrics and drivers with your long-term strategic goals, rather than focusing narrowly on “cutting postage expense in Q1”, for example.

What are the steps to creating a budget?

Step 1: Set the long term strategy with your management team

Jagtar says that “The budgeting process is about linking long-term strategic objectives to achievable tactical goals and actions.” Your budget will function as a roadmap to help you guide your organization where it needs to go, but that can’t happen until you’ve decided what that destination is!

Step 2: Create an Annual Operating Plan by division

This step translates a high level strategy into more detailed operational planning and action items, which should (of course) align with the overall organizational strategic plan. As opposed to the strategy determined in Step 1, the Annual Operating Plan encompasses a shorter term. It should focus on what is achievable given available resources, and focus on the details of your business and the tasks to be accomplished in the coming year.

Step 3: NOW it’s time to create the budget

Strategic plans usually have high-level financial estimates, based upon assumptions. The budget is a bottom-up build of revenue and expense plans, given the tactical activities defined in the operational plan. This process may certainly involve iteration with the operational plan to align goals and the availability of resources.

Why does this work?

This process clearly focuses the individual departments or divisions of your organization, and aligns those (possibly disparate) departments with your overall strategic goals. You end up with clear priorities and objectives, and ensure that any department’s new ideas or initiatives are aligned to the overall strategy. This process also serves to establish a visible near-term and long-term roadmap to measure success. “Visibility” is a key word here; your employees are able to see and understand which priorities the organization has chosen, and why. It’s more difficult to reach this point of trust and transparency if each year’s budget is simply “Last Year’s Budget, But This Time You Need To Spend Less”!

ABOUT THE AUTHOR

Jonathan Howell is the Principal Consultant for Financial Solutions at Blackbaud. He has been working in the industry for nine years, and has been concentrating specifically on Financial Solutions for seven. His primary focus at Blackbaud is to improve the customer experience with The Financial Edge, from purchase through implementation and support. He’s a resident of Charleston, South Carolina and an active member and volunteer at East Cooper Baptist Church. He holds a Bachelor of Arts degree in Communications and a Business minor from the University of South Carolina, Aiken.

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