This article features insights from Jim Croft, former CFO of The Field Museum and senior advisor to the Grant Thornton Not-for-profit and higher education practices. In this article, Croft shares insightful analyses and solutions with respect to budgeting scarce resources.
If your organization is a nonprofit, you’re likely facing many challenges, including increased demand for program services, competition for staff and philanthropic support, and heightened financial uncertainty.
As a result, it’s essential to employ effective management practices in all of your operations — especially when allocating or budgeting scarce resources to maximize programmatic output and achieving your mission.
Link your operating budget to your operating plan
When you hear “budgeting,” you may think “operating budget.” After all, it’s the most common type of budget in the nonprofit world. An operating budget identifies revenues available for the next fiscal year and describes how they will be allocated to various programs. However, this doesn’t mean the operating budget is the same as the operating plan for the upcoming fiscal year. Herbert T. Spiro reminds us that “a budget is a quantitative expression of management’s plan, which presents the intentions and objectives at all levels of the organization, and provides a vehicle for monitoring and controlling the implementation of those plans.” He tells us that we need to have an operating plan in place to serve as the foundation for the operating budget. In other words, the operating plan precedes the operating budget.
According to leading management practices, not only should that plan drive the resource decisions reflected in the operating budget, but the operating plan should be linked to and driven by the organization’s strategic plan. So, the chain of strategic plan, operating plan, operating budget helps ensure that you allocate resources to programs that are central to your organization’s mission. In doing so, your nonprofit will act according to your strategic plan throughout the next fiscal year.
Ask these questions to update your strategic plan
A strategic plan usually covers three to five years and should include a critical review of the past, an assessment of the present, and careful consideration of the future. The review of the past should address internal factors such as historical trends in revenue and expenses. For example, ask which revenue sources have supported the organization, and how have they performed over the past five years or so. What are the organization’s expenses, such as employee pay and benefits, management and general expenses, and fundraising costs? How much do your organization’s programs cost? Such analysis of the past and an assessment of the present will help you identify your organization’s strengths and weaknesses. And carefully considering the external environment is just as essential in identifying future threats and opportunities.
One dependable method of scanning the external environment is the PEST analysis. That acronym refers to political, economic, social, and technological factors that may influence the organization. This analysis gives management information to anticipate or react to potential threats that may arise during the planning horizon. It also allows your organization to identify opportunities to improve its programmatic output.
With that information in hand, management and the governing board can articulate your nonprofit’s strategic vision. And that vision drives the formation of the strategic plan, which will guide your organization in achieving its goals over the next three to five years. Of course, any nonprofit must consider the financial implications of carrying out its vision, which is why a long-term financial plan is critical to the overall strategic planning process.
But as mentioned at the beginning of the article, nonprofits operate in an unpredictable environment filled with challenges and uncertainties. How, then, can you plan and develop budgets? Scenario planning offers one means to confront our ever-changing world.
Use scenario planning to broaden your view
This type of planning was first employed by the military after World War II. The business world began to use it in the 1960s, and it grew more popular in the 1970s, thanks to Pierre Wack, a planner for Royal Dutch Shell. According to Wack, the primary purpose of scenario planning is to broaden management’s view of what might happen in various future external environments. Diverse viewpoints allow your organization to plan for possible futures that might prevent it from reaching its strategic objectives. Unlike market research or forecasts, scenarios offer a number of alternative possible futures. Using these alternatives, your management can develop a comprehensive plan based on the risks and rewards that each scenario presents.
Although businesses and the military have commonly used scenario planning, the nonprofit sector had not. Then in September 2020, The Chronicle of Philanthropy featured an article about scenario planning that caught the eye of several nonprofit leaders. Its authors admitted that although no one can predict the future, there are still ways to prepare for it.
If you want to use scenarios as a planning tool for your nonprofit, where do you start? As mentioned earlier, scanning the external environment is a good first step. Examine the political, economic, social, and technological factors around you in order to determine changes that are or might take place during a particular future timeframe. It is also important to involve organizational leadership, members of the governing board, donors, and other key stakeholders in the community to review the results of the external scan and to answer pointed questions that might impact the future. For example, will a new mayor change your organization’s position in the city? Will the growth of an aging population over the next five years affect your donor income or the types of services you provide?
Armed with the information from the environmental scan, and with stakeholders’ input on it, you can develop scenarios, or narrative stories, that begin in the present and end in the future. Usually, it is best to develop no more than four scenarios in the planning process. Based on the conditions given in each scenario, create a plan for how the organization would respond to each set of circumstances. Ensure that programs, resources, and structure align to successfully meet the challenges described in the future narratives. For example, if a social service organization were to experience a reduction in grant funding, what might happen if it 1) eliminated a program that was dependent on that grant, 2) hired another full-time fundraiser, 3) hold a special fundraising event such as a benefit auction or golf outing, or 4) a combination of any of these options? How would it address a change in the demographics of their service area? How would a museum respond to new entertainment venues that might cause a decrease in attendance and admission revenue? How would a school respond to a decrease in enrollment and a loss in tuition revenue? These thought experiments will broaden the organization’s perspective of what the future might look like, and will add flexibility to your organization’s planning process, better preparing you to meet future challenges.
A cautionary tale: The newspaper industry
The authors of The Chronicle of Philanthropy article cited a research project being conducted during the COVID-19 crisis, which found that most nonprofits still plan and operate with a single expected future in mind. They suggested that if that planning method did not change, nonprofits could find themselves in a situation similar to the one they described in the newspaper industry. In that example, new competition from online outlets upended revenue models in the 21st century. Since media companies continued to operate with a single expected future in mind, many industry leaders were unable to respond in a timely manner to the new challenge. Because they delayed their response, the time needed to adapt and reclaim their position in the news business had passed them by.
That situation should serve as a cautionary tale for nonprofits, which would benefit from paying more attention not only to internal historical trends, but also to external current and potential threats. Those perils might result in decreased contributions, depletion of cash reserves, and loss of relevance in their community. Scanning the environment may allow you to identify not only threats, but also new opportunities to improve programs and offer greater service to your community.
All told, nonprofits are facing more challenges than ever before. That is why it’s especially important to use strong management practices throughout your operations, especially when using budgets to allocate scarce resources for programming. The best approach may be to start by understanding the danger in continuing to plan and operate in accordance with a single expected future. If you include scenario planning in your strategic planning and budgeting processes, you will certainly be more agile and capable of adapting to multiple threats in the future.