Christian Leadership Alliance May 2, 2013 8:00 a.m.
Presenters Mark Jones VP & Senior Banking Consultant ECCU Caryn Ryan Managing Member Missionwell LLC
Clear performance expectations Optimize around constraints Actualize long term plans Inputs Budget Actions Results Meaning Learning Coordinate the team s activities Control over processes
Benefits Cements business planning Aligns teams and units around goals Measurement of results against a standard can drive performance Creates a dialogue and solutions around constraints Integrates with financial reporting Drawbacks Ties company to one year look Too much effort for benefit Goals are either too easy or unrealistically difficult; gamesmanship to spend it all Doesn t accommodate changes in the business May feel off plan in some years, thus demotivating Focus on short term results at the expense of value drivers Internally focused
Activity based budgeting Zero based budgeting Rolling budgets/rolling forecasts Flexible budgets Risk weighted budgeting Targets through benchmarking Statistical forecasting techniques Aligning budgets for impact
Concerns >> High overhead Low objectivity Unclear program costs Irregular revenue Budget Inputs relevance vary a lot High seasonality Overstated revenue Rapid growth LT plan delivery Activity-based budgeting x x x x Zero-based budgeting x x x Rolling budgets/rolling forecasts x x x Flexible budgets x x Risk-weighted budgeting x x Targets through benchmarking Statistical forecasting techniques Aligning budgets for impact x x x x x
Based on activity based costing: Approach to overhead allocation enhancing accuracy of costs Applicable when overhead is a significant portion of costs and products or services differ greatly in volume or complexity Two step process: Defining activities and their cost drivers Benefit: More accurate cost of services/products Multiple cost pools vs. one (traditional) Improved control over overhead as managers see connections to cost drivers Improved pricing of services/products and decisions over manufacturing Drawback: Time consuming (use only as needed)
You need to determine profitability of grants: Grantors may ask for ABB You need to determine whether programs are recovering their costs. You want to benchmark your costs and need a standard methodology. You are stuck trying to determine where to focus cost reductions or activity increases.
What if scenarios used to test/optimize budget cases
Traditional budgeting is incremental. With ZBB, an activity, program, or position must make the cut off for investment each year. Introduced by Peter Drucker in the 1960s. It s andated for certain governmental units at times. Benefits: Ties use of resources to today s goals. Every year is new. Challenges the status quo > Fresh ideas and innovation Drawbacks: Challenging status quo can be uncomfortable. Time intensive. May work best to use on select activities rather than across the board Use when: Assumptions or circumstances have changed and a new approach is required. Generally not useful for grants (justified by funding).
1. Should the activity, program, or position be continued, or might other activities be higher priority? 2. Should the manner it s performed change? 3. If so, how, when, and by whom? 4. How much should be spent on the activity or program? 5. Is change doable?
Abandon Change existing effort: Outsource, automate, simplify, improve, redirect Leave as is
Traditional budget has static time frame of next fiscal year. Rolling, or continuous, budget adds a period (month or quarter, typically) as the current budget expires. Example: Budgeting horizon is 18 months. A new quarter is added to the end of the period as every quarter completes. Advantages: Better reflection of actual results than a static budget Organization focus is always out to the budget horizon (which requires more planning) Multi year rolling budget alerts you faster when you re off long term plan Avoids coasting if objectives are met early Disadvantages: More resource intensive Generally early budget assumptions are not revised, which can make early periods irrelevant. If early periods are revised (rolling forecast), it makes accountability (and aligning rewards) more difficult Generally cannot be as much of a participative budgeting process
Use when: You need to identify and adjust to trouble spots beyond the budget horizon, e.g., liquidity as a seasonal issue. Timing of revenue (month to month or quarterto quarter) is more difficult to plan, though you re confident it will eventually happen. You want staff to focus on the pipeline of opportunities and cycle time to convert.
Efficient implementation typically requires automated budget tools.
Traditional: Static budget looking at one scenario Flexible: Multiple scenarios, each with its own revenue and expenses: Initiated in manufacturing industry to handle variable costs Useful for non profits that may have different program capacities depending on contributions or other fundraising Split costs into those that vary with the program size (variable) and those that do not (fixed) Example based on units: Church school budgets for 80, 90, or 100 students per year. Enrollment closes after budget is prepared, allowing choice of which budget applies. Example based on fundraising (conditional): Budget with and without major gift or grant, e.g., change in program scope. One is base and one is conditional.
Advantages: Multiple cases prepared, organization poised to move between cases and take necessary cost actions Disadvantages: Accountability if there is a degree of control over what is flexing. If lose important grant, should organization be accountable? Use when: Not clear what demand for services will take place Not clear which grants will be received, impacting size or existence of certain programs
Use when not all sources of revenue will come to pass. Use flexible budgets if there are only a few significant scenarios; use risk weighted budgeting if many irons in the fire. Controlling cost of uncertain revenues is critical.
Activity $ Amount % Likelihood Grant 1 200 25 Grant 2 500 20 Grant 3 50 90 Grant 4 125 75 Subtotal grants 875 33 Risk weighted 289
What are benchmarks? Any aspect of operations, financial or non financial, can be benchmarked. Benchmarks may be internal (program to program) or external (comparable or out of the box ). Easiest (and not very useful due to comparability issues): Form 990 data, Charity Navigator How are they used in budgeting? Expenses: See ABC/B, benchmark the cost driver Revenue: Benchmark the value driver
A key question for non profits is how to evaluate and forecast returns for different aspects of development: Channels (direct mail, special events, major giving, web, radio, etc.) Within categories, campaigns or positions may be compared.
Can also prepare by development representative
Need a track record or some history as baseline Performance goals may be one year or multiyear: Tie to long term planning objectives Incorporate transparently into budget: May budget 80 percent of goal Align variable compensation, contract renewals, other rewards, and incentives to percent achievement of the goals: Variable pay may start above 100% (budget or selffunded)
Simple regression techniques: Exponential growth Linear (least squares) Use Excel (and common sense) Multiple regression Non linear regression Fuzzy logic Don t worry, we aren t going here!
Month 1 2 3 4 5 6 7 8 9 10 11 12 Actual revenue 4 6 9 13 18 26 24 25 26 30 30 38 Forecast Month 13 14 15 16 17 18 19 20 21 22 23 24FY Tot GROWTH: Exponential growth trend think compound interest" Last 12 months 56 68 81 97 117 140 168 201 242 290 348 417 2225 Last 6 months 38 42 46 50 54 59 64 70 76 83 90 98 769 FORECAST: Linear growth continue a straight line Last 12 months 39 42 45 48 51 54 57 60 62 65 68 71 662 Last 6 months 38 40 43 45 48 50 53 56 58 61 63 66 621
Plot the data Learn to use R2 and other statistical techniques for validity Correlation is NOT causality
Every long term plan is achieved a day at a time. Budget is a slice of your long term plan. Annual goals build to long term goals. Or, they do not! Budget Long term goals
Occurs when each layer of the pyramid further articulates and describes the preceding layers, beginning at the top
Strategic goals Strategic priorities Strategies (includes those crossing budget year) Program dollars Staff FTEs Tactics in budget year
Determine what techniques best fit your circumstances: Culture Resources available Pressing issue you want to solve Consider the extra effort of advanced budgeting: Need to go beyond financial system for data (e.g., donor data base) Budgeting software to allow greater frequency Get senior leadership buy in to approach ahead: Unless its just analytical or simple forecasting (e.g., regression)
For more resources, visit www.eccu.org/cla2013.