Value-added Budgeting for Nonprofit Organizations

While the need for improved budgeting is obvious for many organizations, numerous budget models, theories, and ideas tend to prevent any concrete clarity in which direction to go. This tends to lead to an organization trying one model one year, finding out it doesn’t create value, and trying something else the next year. This can be a vicious cycle that can take years to refine the approach. These are years that a nonprofit organization likely doesn’t have when it comes to donor dollars and defining impact. More than ever, donors today want to know how their dollars are being used and what impact they are providing.

What you find most often in the budget process are performance measures and sometimes data pasted into a line-item budgeting system. The budget may be reorganized around programs, policy areas, or maybe high-level results, but it’s still a line-item budget. These budgets seldom accomplish much.

The typical budgeting model usually still starts with last year’s numbers. Departments and line items remain its core. New ideas and better ways of doing things often have to overcome the old mantra of “this is how we’ve always done it.” In addition, counterproductive incentives in the budget game remain. On the department side, the game is hide and pad. On the executive side, it’s cut, cut, cut. The bottom line is that budgeting is still all about the dollars and who’s up or down by what percent. Performance and actual outcomes are typically never taken into consideration, except as an afterthought – “now that we have our budget, let’s try to define outcomes that fit our dollars.”

In tough times, this budget model still degenerates into “finding cuts” or “finding savings.” This approach assumes the priorities of last year’s budget and makes incremental changes from that starting point. It assumes the work will be done using current methods. Budget preparers “find” money by trimming fat and more if necessary. “Let’s cut where it does the least damage and pray for more revenue...soon.”

The fundamental flaw in this approach is that no intrinsic, action-forcing mechanism makes outcomes and performance more consequential. Nothing systematically challenges the status quo. The basic budgeting dynamics remain intact.

As a result, today’s budgets crash and burn, regardless of the method. We can no longer afford the old way or “new” ways that just apply different subsets of the same data on top of the old format.

We need to generate measurable value from every dollar. We need to jettison lower-value activities, regardless of how painful. We need a self-executing dynamic that rewards effectiveness and innovation, not special interest pull or longevity.

The budget’s primary criterion should be value defined as outcomes per dollar, not just dollars.

It can be done. Begin by flipping the question from negative to positive. Instead of “How can we cut projected spending to meet revenues?” ask “What’s the best way to produce the most value with the dollars we have?” Ask this question without consideration of what you’re spending the money on now.

It’s about smart spending, not smart cutting.

Adam C. Schwelnus, CPA
Senior Manager, CFO Services
aschwelnus@klcpas.com | 574.289.4011 x256