The smaller the non-profit the more likely it is to fear budgeting. As a non-profit grows, its budgeting needs increase, but the resistance continues. Still, the Directors and Officers of a non-profit are duty bound to fiduciary accountability, and a budget is the surest means to that end.
Profit and Non-profit
Budgeting and planning for nonprofits does not differ from the process at a for-profit business. Businesses would gain from the single minded commitment to mission on the part of non-profit members. And, non-profits would benefit from understanding business processes.
A budget is a plan!
A budget is a financial plan. It covers a clearly defined period of time. It displays the financial decisions and directions the leadership has taken to achieve the organization's goals. If the non-profit does it well, the budget will allocate people, money, time, and processes to fund its strategy.
In a corporation, a budget may show the weekly expenditures necessary to reach its revenue goals at the end of the year. For a non-profit, the budget would distribute the expenditures necessary to reach a goal, such as the completion of a building or an endowment.
Seems harder than it has to be -
- The scenarios of business plans and contingencies are often better thought out and more measurable than those of the non-profit imagination.
- The non-profits' charter and tax-exempt status restrict the use of funds.
- Staffing and capital resources are less consistent and more unpredictable than in a business environment.
- Non-profits have to learn the discipline of strategic initiatives that align goals and operations.
- Non-profits often inherit a budgeting "process" that was barely adequate for the original organization.
- Cumbersome and time-consuming at the beginning, the difficulty compounds over time.
- Budget spreadsheets multiply with growth -error-ridden, difficult to reconcile, and without documentation or audit trail.
There is a solution!
Non-profits can overcome such barriers by pursuing training in finances for non-financial personnel. Most of the difficulty lies in differences in terminology and purpose. There are solutions in understanding the core process and sharing articulated goals.
The key resistance lies in the non-profit leadership's unwillingness to becoming programmers or Excel masters. They don't have the time or patience to wade through HTML, SQL Server, VBA, multi-dimensional macros, and so on.
But, there is a whole inventory of new web-based budgeting apps that let non-profit budget personnel to browse, log-in, enter data, and watch the budget roll-out:
- Statements of Activities are aligned with cost centers and programs.
- Office Costs are effortlessly allocated across programs and projects.
- Cash Flow is forecast is forecast based on entries.
Consider the value of QuickBooks Non-profit, Quicken, Accounts by Windows. Aplos, ZoHo Books, Big E-Z, and Gnu Cash. There are also software applications available for free as donations by Windows, Adobe, Cisco, and other prominent providers through techsoup.org.
Budgeting the easy way!
For-profit or non-profit, finance professionals are appointed to provide value to their organization through analysis. They are responsible for timely, accurate, and relevant information reports. They are expected to provide relevant information to their internal customers for decision-making purposes. They need to provide the data needed to drive the organization towards its strategic goals - short and long-term.
You do not have to be a financial whiz or an Excel black-belt to make budgeting and planning for non-profits simple, productive, and value-added.
The truth about Excel
The truth about Excel as a budgeting tool is that...Excel is a wonderful tool! It’s just that sometimes it’s not the appropriate tool for the job. The major problem that organization’s face when using Excel for budgeting is that they are using the wrong tool for the organization’s size or/and complexity.
As usual we are writing this article in the context of budgeting and planning for Nonprofit Organizations (NPOs); however the points discussed in this blog post apply to any large or complex organization facing challenges around budgeting in Excel.
The Good | Why Excel is such a wonderful budgeting tool
Excel is a great budgeting tool because:
There’s little or no training required to use it
It is very flexible
It requires almost no IT overhead or infrastructure
It’s easy to distribute
It easy to administer.
So what is the problem I hear you say! With little or no training, I can build a fairly sophisticated model, easily modify it without the help of IT, and distribute to all my users without anything fancier than email. And even if it breaks, I can easily get all the sheets back, fix it and send it right back out.
For a small NPO, this actually might not be a problem. For a large NPO however, the very features that make Excel great are what present significant challenges.
Let’s take a look at the budgeting process for a medium or large NPO with scores of departments; and with operations in several countries.
Our budgeting hero creates this complex model with macros, links, consolidation capabilities etc. They send it out to scores and maybe even hundreds of users. Despite the fact that the Excel workbook is locked down and protected, some smart Alec user has found a way to hack into the spreadsheet to modify it to fit their particular needs. At the end, our budgeting hero consolidates all the spreadsheets and it doesn’t work! Smart Alec has inserted rows and columns and now the consolidation doesn’t work. Even worse, smart Alice also managed to go in and hardcode some cells and in the process, broke the links to the personnel data file!
So all of a sudden all those benefits of flexibility, ease-of-use, distribution etc. have become liabilities.
The Bad | Why Excel can be a problematic tool
For NPOs of a certain size, budgeting in Excel can be a problem because of the volume of their data or the complexity of their process. Some of the issues that they face with Excel include:
Difficulty consolidating numerous spreadsheets
Lack of ownership
Poor process management
Little or no scenario or what-if analysis.
The real problem with Excel as a budgeting tool for a medium or large NPO is that it’s not a robust enterprise software application; with all the built-in functionalities that ensure security, accuracy, process control etc.
Going back to the Example of our budgeting hero for a moment, when you are consolidating hundreds of spreadsheets “manually” you simply increase the risk of errors significantly. It becomes very difficult to keep track of the different versions, changes made by different users, links to other spreadsheets etc. At some stage our budgeting hero gets frustrated and limits the model so severely, that she ends up doing a lot of the budgeting on behalf of the users; immediately allowing them to surrender ownership of their budgets.
A really big problem with Excel for budgeting though is the lack of reporting. If you are large NPO budgeting by departments, projects, restriction codes, countries, objective codes etc. it is really difficult to analyze the large amount of data at your disposal. The ability to easily drill down into your budget data by the different dimensions (e.g. salaries by projects and country) is difficult in Excel. Doing what-if analysis to determine the best, worst and likely budget based on certain drivers like: number or donors and pledges, number of employees, number of overseas vs. local staff etc. is extremely challenging in Excel.
The Ugly | Why Excel can be a disaster
You can however really run into serious problems with Excel if you also do not have good process around your Excel system. You could find yourself with these problems:
Error-ridden and inflexible budgets
Poor audit trail
System restricted to the ability of its creator
Poor knowledge transfer.
So raise your hands those of you who have found themselves in this situation: you submit your budget for approval and then discover an error. Even worse you have no idea where that error is coming from. I have been there…and it turned out some smart Alec overwrote my formula with a hardcoded value. When we changed assumptions on the second pass of the budget, his numbers of course did not change to reflect the new assumptions.
As we were working in Excel, I didn’t have a robust audit trail to track who did what, when. I needed a system that automatically documented his changes.
One of the really horrible some situations some organizations find themselves, is where they have this really sophisticated, macro-driven budgeting system (and I am guilty of building a few of these) developed by someone who has subsequently left the organization. This person was not able to transfer the appropriate technical knowledge to the Finance department – mainly because no one there understood the VBA programming language.
The result is that the organization is stuck with what is now an outdated system that has not kept up with the recent strategic changes that have occurred within the NPO. Nobody is brave enough to modify the original model. So when you ask the question, “why do you guys do this like that?” You get…“that’s the way we’ve always done it”.
Okay, let’s give Excel a break!
There is nothing wrong per se with using Excel as a budgeting tool; and for certain organizations of a certain size this is actually the perfect solution as long as some of the best practices are followed.
The problem arises when the organization grows to a certain size; or their budgeting process becomes complicated. As an organization you know that you have outgrown Excel when:
You are spending more time collecting, consolidating, verifying and consolidating data, rather than actually analyzing the data
Despite the significant and important data gathering process, you cannot quickly run a simple report like “how much will office supplies cost across all our 10 major projects if we increase it by 15% from last year”
You dare not change your budgeting model to suit your current strategy because the person who built it 3 years ago has left the organization
Even though you discovered that someone has broken the budgeting model, you have no way of knowing what was broken, when, and by whom; so you can roll back the changes
Your budgeting process is taking you months to complete instead of weeks.
This article is a primer for a much longer article I will write in following weeks on the pros and cons of budgeting in Excel for nonprofits.
So what's the deal with budgeting in Excel? Actually Excel as a budgeting tool is a great utility for small Non Profit Organizations (NPO) and works just brilliantly in that scenario; especially if your budgeting model is quite straightforward. The problem arises when the NPO grows to a medium and large one; or the budgeting model becomes quite complex. In that scenario, Excel can actually become an impediment to the success of the NPO because they are then using the wrong tool for the job.
Can Excel do the job in that scenario? Sure and we see it all the time, but that's like asking a highly technical computer science graduate if he can build a computer for his job. Sure but what would be the value of that when he can just buy one? At the end of the day the outcome he is looking for is not can he build a computer...but can he use the computer to achieve his professional goals.
This is exactly the same thing with finance professionals and using Excel as a budgeting tool. If you find yourself spending weeks and months building and managing a complex Excel model, you need to step back and remember that the outcome you are looking for is not how to build or run complex models; but how you can use a budgeting tool to easily attain your goal of a smooth, easy, timely and accurate budgeting process.
What are Performance Management (PM) Portals?
Organizational or Corporate Portals, or to use the official industry term: Enterprise Information Portals have had their 15 minutes of fame and vanished into the sunset. However, like a lot of these fads, there is usually a valid, underlying value proposition. Take the Internet and the dot com boom as an example, after the dust settled we had strong viable "pure play" online businesses: Google, Amazon.com to name two. This article looks at the legacy left behind by the hype surrounding Corporate Portals and how the concept can be applied to Nonprofit Organizations (NPOs) industry.
A corporate portal is a web-based concept that serves as a single gateway to an organization's information and knowledge base for employees and other stakeholders. It enables the capture and distribution of structured and unstructured data. This is a particularly useful approach for NPOs for reasons that range from an easier dissemination of strategy throughout the organization, to easy access to pertinent information relevant to the different stakeholders.
How does this work in practice?
Let’s take a very simple example to illustrate how a specific individual might leverage portal technology. Take a new financial manager for the finance department who has just joined a large organization. She has her HR induction course and is told she needs to go setup her personal web page on the organization’s portal. So she goes to her desk, logs in and based on her profile she is given a list of options that could appear on her personal web page. They might include:
HR information: personal objectives that are tied to her department’s and organization’s goals; a selection of benefit packages, personal development programs, employee handbook
Departmental information: the finance budget, department-driven reports and dashboards
Organizational information: information on programs being undertaken around the world; employee and social responsibility; training courses
On selecting from this menu tray, she automatically creates her own personal portal. The various software programs that produce her budgeting and operational information, as well as the accompanying dashboards are concealed from her. She doesn't need to learn three different software packages to get the information to do her job.
The real value of a portal based approach as it applies to NPOs is that the information delivered to the user is targeted and profile driven. So the right people get the right information at the right time. The CFO for example could select from her list of options, the monthly progress towards the fund raising goal, monthly Statement of Activities and the management dashboard showing the performance of the organization across all of its key perspectives: “customer”, finance, processes and organizational capacity. The performance can be color-coded and presented as graphical, intuitive, analytic icons showing green for above performance, yellow for meeting performance and red for below performance. The VP of Budgeting could customize her personal portal so she could run the budgeting application directly from her portal, set up the appropriate drivers, consolidate the numbers and distribute the relevant reports to specific departments.
One of the advantages of portals is that it can bring down the cost of training. Most users are familiar with a web-based interface as they surf the Internet regularly. A portal means that consumers of information need not necessarily have to learn about the different packages for strategic planning, budgeting, dashboards etc.
Why should the CFO for example need to learn how to run one report from her budgeting application and yet another one from her accounting tool. She should be able to select the reports she needs from her menu, indicate what frequency she needs and get it delivered to her personal portal automatically. If however, she had the inclination to delve into the software (some CFOs like to do their own what-if analysis for example) she would always have the option to launch the software from her portal.
PM Portals advocate user-defined workspaces and encourage collaboration. Incorporating some of the collaboration tools from Microsoft, for example, it is possible to do specific tasks in real-time within the portal. For example, a strategy-driven organization can do their strategic planning with their senior leadership team online and see the effect of the different scenarios on their forecast operational numbers, all in real-time.
Some vendors have undoubtedly created PM portals based around their products. So for example, some vendors have portals from which you could run all their installed products. This however, in this authors view is a limited approach to PM portals. If a customer had products from two leading vendors, they could potentially have two separate portals. This in one sense defeats the purpose of a PM portal. The overriding aim of a PM Portal is that all of the information required for the organization to operate effectively should be accessible from the single portal. Undeniably, this is very difficult to do correctly. It requires significant resources, expertise and data integration to get it right. However, the expertise and software exists today to make this a reality. It is quite possible, regardless of the vendor and application, to provide the relevant information to the pertinent stakeholder, seamlessly, from a common and central gateway.
Now that portals are no longer flavor of the month, how does an organization get to embark on such an ambitious project? A good approach is to make it performance driven. The key decision makers for most PM projects are the CFO and CEO. This is because by their nature, true PM projects tend to be expensive, strategic and demand significant resources. They also affect almost every department of the organization. During the course of a truly integrated PM project, questions are asked such as how we measure the performance of each area of our organization. What are key strategic objectives? What are the relevant strategic initiatives that we should be focused on? These are strategic questions that permeate every level of the organization. Consequently, finance, where most PM projects originate from tends to run some of the biggest, most visible and influential projects within the organization. It gives the opportunity therefore to leverage the resources and mind share within the organization to create portals that not only benefit all other departments, but enable them tell a compelling story.
A project like this enables the finance department and the CFO start to change the perception of finance to that of a key strategic partner within the organization. Finance stops being just a cost center that churns out numbers weekly, monthly, quarterly, but a strategic department that drives growth, performance and strategic alignment.
Having espoused the virtues of PM portals, it is important to acknowledge that it is fiendishly difficult to execute. It requires the amalgamation of a series of technology (e.g. PM, data warehousing, Enterprise, Information Management, Portal tools etc.) with specific expertise in search, categorization, collaboration, personalization, profiling, application integration, and security. The future for PM however, will be inevitably portal-driven. This can be seen by the acquisition strategies of the larger software vendors. The vendors are increasingly bundling their products into a cohesive package that enables them tell the type of story indicated above. Companies like Oracle with it's powerful database as a common platform will one day offer all the necessary tools: from HR to PM to tell that compelling portal story. The biggest and most underrated player however, is Microsoft who has been intelligently buying several PM vendors and tools (e.g. FRx) as well as financial transaction systems (e.g. Great Plains) that service large and small organizations. With the ubiquitous Microsoft Office and Windows operating system as well as its expertise in portal technology, it is not a giant leap for the company to provide a portal solution for users that comprises a full set of PM information as well as other critical information.
In conclusion, while portal-based performance management is a great idea, it is very difficult to accomplish. There have been success stories however. These projects tended to take enormous resources and several years to complete. The benefits for these successful companies have been enormous. Their users have seen their productivity go up, management has seen improved speed of decision-making as result of having quick and ready access to key organizational information. While there's little doubt that portal-based PM will eventually be the norm, it is still a few years away, and when it does arrive it will driven by the vendors.
Defining Impact Management:
We define Impact Management as comprising an array of strategic, functional and operational processes supported by technology, which enable mission-driven organizations to define strategic goals – within the context of a stated mission – and then measure and manage performance against those goals.
The question therefore that Impact Management seeks to answer is quite simple: how do we as an organization measure the impact of our mission on the recipients of our services; our employees, donors and other stakeholders. The answer should not be subjective and anecdotal, but objective and measurable.
The idea of impact management as defined above is not a new one and has been espoused in various forms over the years. There exists prominently today, concepts like “The Logic Model”, “The Balanced Scorecard” etc. The challenge however, has always been the ability to execute these kinds of solutions quickly and effectively within a reasonable timeframe, whereby the results can be felt within the organization relatively quickly.
For mission-driven organizations, there needs to be a seamless linkage between strategic planning and performance evaluation. From a strategic planning perspective, this involves the ability to disseminate the mission into strategic goals, measurements and accompanying initiatives. From the performance evaluation perspective, it is the ability to undertake activities that will have an impact and produce the desired outcome. Underpinning these two pillars are the resources of people, money and effort, as well as the technology platform.
Thankfully in the last few years the technology has caught up with the theories; and importantly, in some cases the theories have been simplified and evolved to be more practical. Today’s performance management software enables the creation of a consistent, unified platform that facilitates that linkage between strategy and operations from within the same software. In practical terms it means one can budget by initiatives and measure impact and outcomes seamlessly within the same software tool. This is the essence of Impact Management as we define it.
Impact Management in Practice:
In our experience, the best performing mission-driven organizations go through a process similar to the steps outlined below:
Validating the Mission – Why we do this?
While in most situations, the mission would already have been developed, there isn’t always a structured and objective way to validate, communicate and measure the mission statement. This is absolutely crucial to the performance of a mission-driven organization.
Optimizing our Processes – How we do this?
Working in mission-driven organizations, the importance of collaboration is paramount to success, so how do we make sure “everyone is on the same bus, headed towards the same direction”?
Having a formal framework is the key. Using such a framework an organization is able to breakdown it’s mission and vision into clearly defined strategic goals from the perspective of the various stakeholders. Metrics for measuring these goals could be defined and the appropriate initiatives to support these measures and goals agreed upon. Field activities need to be accurately evaluated and linked to programs whose outcomes can be accurately measured
Our Resource Prioritization – What is the best way to do this?
As any organization only has finite resources, performance management software tools can be used to ensure that the right amount of resources are allocated appropriately to the initiatives and activities that would produce the desired outcomes.
Our Performance – How well do we do this?
In today’s climate of scarce, but highly sought after funding, it is vital to demonstrate fiscally responsible, results-orientated performance. The software tools earlier mentioned should also be used in evaluating the impact of the organization’s activities and were required, interventions made by managers in light of this information to improve future performance against strategic goals.
Performance Management Software:
As indicated earlier in this blog a key tenet to the success of today’s impact management solution is using the right software. We define performance management software as a consistent software platform with the following features:
Strategic planning and management
Consolidation and reporting
Management of key performance using management dashboards.
In practice, this means that once the strategic plan is complete, a strategic budget can be built based on the initiatives that will support the strategic goals. While this only represents part of the budgeted expenditure, the remainder – represented by the operational budget – can be formulated by department for example. As field work is driven by specific activities linked to programs, it is then possible using concepts like Activity Based Costing (or Budgeting) to determine the true cost of producing the desired outcome.
This could prove to be an insightful tool for donors and the fundraising process because fundraisers do not need to rely purely on the emotional and anecdotal levers, but also on sound objective logic. They should be able to concretely demonstrate that if they are to receive $X over a certain period, they would be able to progress Y% towards their ultimate outcome.
As the CFO of a major non-profit, you heard about the absolute need to manage your performance; you listened to your CIO expound the virtues of an integrated information platform: “one version of the truth”. So you signed off the check. You paid a few hundred thousand dollars for an end-to-end Enterprise Performance Management (EPM) software [Think budgeting & Planning, Strategic Management, Dashboards etc.]; a few more hundred thousand dollars for impressive looking consultants with impeccable references who sounded like they knew your industry. Now you are able to pull up a futuristic and glitzy looking dashboard with knobs and dials that tells you at any one time what each department, division, region and country is doing. In fact you have a near flawless, apparently perfect information asset. However, there’s one problem: all your operational managers are still using Excel. Even worse, they download data from the different tools in the end-to-end suite into Excel, manipulate it and in some cases, type it back into your EPM package. So you still have a lot of the problems you started with: poor audit trail; data inaccuracies; inability to rely on the numbers etc. You have a situation that might be described as: a perfect imperfection.
So how did it all go wrong?
Somebody failed to come up with an integrated EPM strategy to go with the integrated EPM software. The best way to ensure a truly successful EPM implementation is to work with the relevant stakeholders: finance, IT, vendors, consultants, end users etc. in creating a truly integrated EPM strategy that covers all areas of your business.
Very often we see customers who have been swayed by their competitors to acquire the latest EPM tool. They have undertaken an informal software selection process and selected a vendor that presented the best during the fashion parade. The needs of the business however, were not properly aligned to the capabilities of the different tools being purchased. Once the customer purchased the software, they suddenly look up, apparently startled by the cost of this sudden investment, and decide they must save costs during the implementation. So they employ a bunch of independent consultants and lower cost consultancies, each with specialties in one of the tools within the EPM suite they have purchased. The farsighted organizations are aware of the need for project management, so decide against a project manager with experience in implementing these integrated solutions, but “somebody from finance”. So here we are with 4 separate streams for each tool: Strategic Planning; Budgeting & Forecasting; Financial Reporting and Dashboarding & Scorecarding. Each stream has “somebody from finance“ managing the project. As the “project manager” has never delivered this type of solution before, they are working towards a vision that was presented at the pre-sales demo. As each project manager is from a different department, they don’t have implicit knowledge of what the other departments do and therefore how the different streams might need to co-ordinate their work to ensure the eventual data from the different streams are integrated and can be shared easily. We have seen clients develop budgeting and reporting systems as two parallel streams, then get to the end and find that they budget at such a different level of granularity that they couldn’t directly load their budget into the financial reporting system to do direct comparisons between their actual versus their budgeted data.
An enterprise performance strategy
A well thought out Enterprise Performance Management (EPM) strategy takes into account not just the needs of the appropriate stakeholders, but a review of the underlying source systems; the need to re-engineer existing processes and most importantly, align the stated strategic goals of the organization with tools that have been purchased within the EPM suite. So for example, if the organization has a stated goal of “reducing poverty in francophone Africa”, how do you turn this somewhat subjective goal into measurable objectives that can be tracked using the myriad of tools within the EPM suite from strategic planning to financial reporting?
Implementing EPM successfully
So how does an a nonprofit organization go about achieving a truly functional, integrated Enterprise Performance Management solution that permeates the whole organization; is used by all the key stakeholders and delivers the organization-wide strategic goals? With a great deal of forethought, planning and execution!.
The first psychological hurdle to overcome is that these solutions are complex and challenging. You therefore need to work with people who have extensive experience delivering these solutions. You need delivery partners that can look across the whole organization; understand the industry, its challenges, processes and culture.
The approach should be both top-down and bottom-up. From a top-down perspective, it is imperative to understand the strategic goals of the business and how they can best be delivered using the right tools at your disposal. From a bottom-up perspective, you need to understand the needs of the end users: the systems they use, the way they work, how the solution will affect them and what processes need to be reworked to enable efficiencies within the proposed new system.
The initial step of aligning the company goals is to make a full list of the tangible and intangible strategic goals, then turning these goals into measurable metrics that can be measured organization-wide. So for example, if an organization has a mission like: “reducing poverty in Francophone Africa”. You can break this down into strategic goals and metrics that would serve as consistent measurable Key Performance Indicators (KPIs) for the company. Once these have been achieved they need to be tested and shared with the relevant level of employees; their feedback captured and used to refine the KPIs again until everyone that will be measured by these metrics buys into them.
The next step is to incorporate the strategic goals and metrics into the complete suite of tools. So for example, the stated goals and measures will not only be captured in the strategic planning & management, but they will help set targets in the budgeting & forecasting tool for comparisons during the budgeting process. These same metrics could be built into the financial reporting package so that across an international nonprofit for example, all divisions, regions and countries can be measured equitably and consistently. Finally, the metrics and the targets set from the strategic planning tool should be represented in the dashboarding application.
It is obvious therefore, that if you had different streams not working closely together in trying to achieve the same goal, it would be very difficult to assemble a cohesive and consistent Enterprise Performance Management solution across all the different tools. For a start, you would need to ensure that you have the same or complimentary level or detail across all the tools so their data can flow seamlessly amongst themselves with little or no data input or re-keying. You would need to co-ordinate the disparate group of users that the different tools touch and ensure their buy-in. This would entail a change management process so they know how their jobs will be affected by the new solution and how they can contribute positively to its success. Only a deliberate process like this will wean them from their reliance on their tried and trusted Excel spreadsheets.
The role of senior management
The success of a truly integrated Enterprise Performance Management solution however, hinges first and foremost on the support of the senior members of the organization. They have to see true strategic, operational, technological and emotional value, both in the short and long term. Once the project has been approved, it has to have a very senior executive as its champion throughout the organization. This individual needs to have the right level of influence, so in most cases it’s the CEO, CFO or a very senior VP. The role of champion requires selling the benefits of the solution across the organization. However, it also requires the dissemination of what can be a paradigm shift in the culture of the organization. People will be measured and compensated differently based on the new system. The CEO of a large organization we worked with decided he did not want a 50-page monthly report, but a 4-page report of which the 1st page was a sheet of strategic goals and measures. Every senior manager was measured by this same 4-page report as it pertained to their department, region, country etc. The 4-page report was produced seamlessly from the EPM tool, with each manager having the capability to drill down behind the numbers on those 4 pages. As far as the CEO was concerned, each manager should be able to run their department or division based on those 4 pages. If he had further queries, then the managers could always drill further into the data, but those four pages where able to provide a full picture of each division as well as the company as a whole.
The missed opportunity
The major omission when organizations design Business Performance Management solutions is that they neglect to take advantage of the opportunity to thoroughly review, and where necessary re-engineer some of their existing processes. Time and time again, we come across instances where organizations have simply recreated inefficient processes in the new software system. To take full advantage of the new EPM solution, the company needs to take a meticulous assessment of all processes that will be impacted and decide whether they can be improved not just from a process standpoint, but also in aligning to the EPM solution. So for example one of the clients we worked with wanted to have a seamless data transfer of their fixed asset data from their asset management system to the EPM platform. However, they only discovered well into the project that their asset management system did not have the right level of granularity to enable the data transfer. They therefore had to go back and modify their asset management system, which caused a delay in the project.
I started this article somewhat impudently challenging the value of Enterprise Performance Management software. Make no mistake however, of my absolute belief in them. The issue of EPM software not delivering its full value, lie not in the capabilities of the tools themselves, but in the implementation. It is absolutely possible for organizations to have management dashboards that leverage the various EPM tools in providing true, accurate, consistent information for informed decision making. However, in my opinion, organizations do not put a true cost to the time and effort required to make this a reality. The path to a successful EPM solution has to be one intrinsically entwined with the strategy of the organization. Furthermore, an EPM roadmap that incorporates all aspects of delivery: organizational goals and vision; process re-engineering; project management; change management and software implementation needs to be in place to ensure success.
Firstly full disclosure: I am answering this from the perspective of a consultant who helps organizations setup their Financial Planning & Analysis (FP&A) systems, so take this for what it's worth.
What is the Role Financial Planning in Nonprofits?
I would say it depends on the current organizational structure (outside FP&A) and the roles & responsibilities that lie therein. So for example is there a strategic planning department? The question might be best answered by providing a scenario; and for simplicity we will assume the organization does not have a strategic planning department.
In this scenario, the operational FP&A provide its "customers" with the tools and information required to make effective decisions about their departments. They facilitate the ability of their departments to attain their specific strategic objectives and initiatives in alignment with the organization’s strategic plan. The FP&A department is responsible for the execution of the overall strategic plan and its cascade to the departments for execution. Yes, budgeting, forecasting, reporting is in there somewhere as well, but we will come to that later.
So let's flesh this out a bit...say the organization went through the process of verifying their mission & vision and came up with a 5-year strategic plan that includes short and long-term goals, strategic objectives, measures, initiatives to drive those measures etc. That strategic plan needs to be broken down into yearly operational plans that form the basis of the annual budget. If you are a disciple of Kaplan & Norton you would have a budgeting universe that comprises (strategic & operational budgets). The operational budgets are typically bottoms-up, meaning that responsibility for the budget creation is down at the operational level. The strategic plan is a top-down process facilitated by the FP&A department in conjunction with the senior management team. The strategic plan is the source of yearly targets across the organization, but far more importantly, the fulcrum of decision-making as to the best allocation of corporate resources (time, money, effort, people, and systems) across the entire organization. It answers the question: what are the best initiatives/projects to pursue this year in order to meet the specific strategic goals?
So how does the budgeting, forecasting, reporting come into play?
Well, these should be one facet of the overall roll FP&A role. If one assumes that the overarching role of FP&A is to help pilot the organization towards its stated goals and help them see around the bend, they need several tools to do that. Those tools include strategic planning, operational planning/budgeting, predictive forecasting, reporting etc. It is really important for the modern FP&A department to see these merely as tools and a means to an end – and this is where technology comes in – as opposed to the end in itself.
So the role of the FP&A department needs to be less transactional and more strategic. It needs to work with the leadership team in answering specific questions about the organization like:
How well are we doing against our stated mission and vision; how far along are we to attaining our goal?
Are we effectively allocating our resources to the initiatives and activities that will produce the desired outcomes?
What programs should we be focusing the most resources because they have the biggest impact?
What are our most cost effective programs in terms of cost to impact; and how can we learn and replicate these?
In which countries/locations are we most effective and why?
Are we accurately forecasting our cash requirements?
If we get $X more (or less) funding this year, how does this increase (or decrease) our impact by Y%
Are the activities of the field staff truly aligned with the overall mission?
How well are we benchmarking against our peers?
What the FP&A department should be doing less of is processing budgets, writing complex macro-driven reports, consolidating multiple spreadsheets, because there are low cost tools out there that can automate that kind of stuff, leaving the FP&A department to move up the food chain and be a true partner to the leadership team.
Why do we need budgets?
Budgets are a financial plan over a clearly defined period that expresses monetarily the leadership team’s decisions on how the organization will attain it’s clearly stated goals. If done correctly a budget enables a nonprofit decide the best allocation of its resources (people, time, money and systems); what programs to pursue during the period because they are strategically aligned and adequately funded.
Planning challenges faced by nonprofits
Nonprofits however face unique budgeting and planning requirements that include:
Planning by restricted and restricted funds
Budgeting by programs and projects
Detailed staff and capital planning
Alignment of strategic goals with operational activities
Budgeting by Strategic Initiatives
These requirements are sometimes the reasons why nonprofits find the budgeting and planning process so difficult.
But does Budgeting really need to be so difficult?
So why is budgeting so difficult? Well, for a start, it’s time consuming and cumbersome. In a lot of organizations the budgeting model was developed by an in-house guru…who has now left! It’s sophisticated, macro-driven and nobody knows how to modify it. So everyone just continues using it the way it is even if it no longer truly meets the needs of the evolving organization.
In organizations were this complex process is managed by spreadsheets across multiple departments, the well-known phenomenon known as “spreadsheet hell” is encountered:
Error-ridden and inflexible budgets
Difficulty consolidating the numerous spreadsheets,
Poor audit trail
Little or no scenario or what-if analysis
But the Solution is out there!
So why would people put themselves through this amount of pain when there are easier options available? The main reasons are inertia; familiarity with the existing system; resistance to change. An unawareness of the fact that there are truly simple solutions out there.
Thankfully in today’s Internet driven world of Facebook, online travel booking etc., there is a new wave of software vendors at the forefront of what I call Budget 2.0. These are web-based budgeting applications designed for today’s budgeting user. These tools understand that budgeters don’t want to be programmers or Excel whizz-kids. They don’t want to understand HTML, SQL Server, VBA, multi-dimensional blah, blah in order to put up a good budgeting system. Budgeters want their budgeting experience to be similar to that they currently encounter on the web. They want to crack open a browser, login, type in their data and watch everything happen in the background: Statement of Activities automatically being built up by cost centers and programs; head office costs effortlessly allocated across programs, projects or whatever the specify; Cash Flow being forecasted on the fly based on their entries etc.
That’s what I call Budgeting the Easy Way! This should be the rule not the Exception. Finance professionals are employed to provide value to their organization through analysis; and the provision of timely, accurate, relevant information to their internal customers for effective decision-making. In today’s world the very senior finance professionals within an organization have a duty to add strategic value by helping drive the organizations towards its key strategic goals. Nowhere here does it say Excel jock or software programmer!