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Annual Budgeting For Small Nonprofits in 8 Steps

 

Budgeting for Nonprofits

How does a nonprofit organization (NPO) measure the impact of its mission on the recipients of its services; its employees, donors and other stakeholders? The answer should not just be subjective and anecdotal, but objective and measurable.  An annual budget is one tool that enables nonprofits answer this question.

The process of creating an effective annual budget can be challenging for small NPOs for a variety of reasons including: insufficient resources, lack of financial expertise etc.  Click on the link below for an eBook that aims to serve as a guide to building a simple, automated annual budgeting process for any type of small nonprofit using a low cost online tool.

http://goo.gl/b3PYuE

 

Is Strategic Planning really that important for a nonprofit?

 

 

Strategic Planning

So how important is Strategic Planning…really?!  There are a ton of nonprofits that get along happily without it. As a matter of fact, I spoke to the head of one the other day and they had never heard of the concept in the structured way that we in the industry talk about it.  Nevertheless they had run their nonprofit successfully for years.

Well that’s like asking one of those few non-svelte NBA players how important is nutrition and healthy eating habits!  Could you get along at a pretty good level without it? Sure you can, but are you operating at the absolute peak of your powers?  Well that’s an altogether different story.

Champions are those rare breed of people who strive to ensure that every aspect of what they do is done to the very best of their ability.  Now that’s an approach we should all aim to emulate.

Is Strategic Planning really that important for a nonprofit?

So how important is Strategic Planning…really?!  There are a ton of nonprofits that get along happily without it. As a matter of fact, I spoke to the head of one the other day and they had never heard of the concept in the structured way that we in the industry talk about it.  Nevertheless they had run their nonprofit successfully for years.

Well that’s like asking one of those few non-svelte NBA players how important is nutrition and healthy eating habits!  Could you get along at a pretty good level without it? Sure you can, but are you operating at the absolute peak of your powers?  Well that’s an altogether different story.

Champions are those rare breed of people who strive to ensure that every aspect of what they do is done to the very best of their ability.  Now that’s an approach we should all aim to emulate.

The Role of Technology in Strategic Planning

 

Technology in Strategic Planning

So how significant a role does technology play in strategic planning?  Some would argue, a little (or superficial) role.  In my opinion, there is a disconnect between strategic planning and information technology.  I see the hardcore strategic planners do their thing with technology playing an almost incidental (if at all) role.  Conversely, I have seen the technology people in this space implement so called strategic planning solutions with just a cursory glance at the discipline that is strategic planning.  For them it’s all about KPIs and Business Intelligence.

I therefore see a lot of cases where there is a complete disconnect between strategic planning and apparently complimentary technology.  In some ways this is understandable because they can be seen as somewhat separate disciplines.  The future will soon put a stop to that though!

The best strategic planners will be those that can comfortably straddle both domains.  Strategic planning should drive the information driven organization: a concept that I call Information Intelligence (II).   Strategic planning = Information Intelligence!

There is no doubt in my mind that all organizations will be truly information-driven: healthcare, car sales, airlines - to name a few - will fall prey to this revolution. This is not the future...it's here now and rapidly gaining ground.   Let’s take a look at the healthcare industry and electronic patient records.  Today, these are digital and in some cases available in the cloud.  It therefore doesn’t require a huge leap in imagination to think about the ability to attach it to an online identity.

For example, I personally use an online identity tool that follows me everywhere I am online. I use it to automatically fill forms, pay for purchases etc.  Why couldn't I add medical records and other personal information to it?  Why couldn't I share parts of it that I want with my restaurant, airline or real estate agent?

But from a strategic planner’s perspective Information Intelligence (II) is not the same thing as Information Technology.  II is about strategic planners using their role as trusted advisers to paint the information-driven future for their clients.  Strategic planners don't need to be technologists to pull this off, but need to partner with one where appropriate. 

The perfect ying-yang partnership being a technologist who gets strategic planning...and a strategic planner who gets technology; with the aim being to generate long-term engagements and add incredible value to the client.

A real life example of this was at a healthcare provider where the IT director was trying to build an information driven platform for the organization but was gaining no traction.  The reason being it was perceived (and the language being used didn’t help) as an IT project and the organization apparently didn’t have any budget for “shiny new IT toys”. A new medical director joined who was strategy driven and saw the importance of using strategic planning and associated technology to ensure that its mission, vision and strategy were constantly aligned with, and measured against the day-to-day operational activities.

The new medical director repackaged the technology platform as part of the strategic plan which turned into part of 3-year engagement for both the strategic planning consultant and her technology partner.

So when I talk about Information Intelligence and strategic planning driving an information led future for an organization, I am not talking about a 500 page McKinsey report - though there is certainly a role for that type of work.  Instead I am talking about small strategic planning consultancies who have had the fortune of accomplishing the most difficult task...being the trusted adviser to the leadership team.  How do you turn that into a multi-year engagement that also happens to position you (and importantly) your client as visionaries.

I would highly welcome feedback.  Please feel free to share this if it resonates congruently with you....

Linking Strategic and Operational Planning

 
Strategic and operational planning
The future of a non-profit may depend on linking strategic and operational budgets. Most early-stage non-profits lack this sort of sophisticated budgeting know-how. When you rely on spreadsheets for budgeting, you risk becoming trapped in a horizontal view of your world. 

Operational Budgets

  • Operating Budgets are short-term, typically a year, based on assumptions about income and expenses connected with the organization's operations, such as administration, marketing, and labor. It does not include long-term costs (debt) or income (investments).
  • The focus of the Operating Budget is on managing and reducing current costs. It wants to assure the presence of funds to continue the organizations's operations. 
  • Non-profits need a budget that weighs expected donations and revenue against the expenses necessary to function. 
Obviously, the better the information and justification available - for income and spending - the better the budget.

Strategic Budgets

A Strategic Budget requires a different skill set. While the Operational Budget monitors spending, cash flow, and revenue, the bigger budget challenge lies in using the budget process to map out a future. But, the future always presents new needs. It tries to shape decision making, prioritize allocations by timing and potential, and consider the present Operating Budget as only one leg in a longer race. 

Linking operations and strategy:

An Operating Budget is easily understood and read. It is not unlike your personal or household budget. You know what's coming in, and you try to control your spending between pays. You make personal strategic moves when you plan some set asides for retirement, investment, or college education. Non-profit officers, personnel, and members participate easily in the Operating Budget process and understand their accountability.

However, linking operations to strategies gives the non-profit stakeholders a larger picture of the overall plans, encourages their participation, and provides a greater transparency. 
  • Communication: Effective communication channels link decision making with base information. When strategic goals are defined early, the Operating Budget has a direction to follow and pursue. 
  • Allocation: With strategic goals in place, an Operating Budget has purpose in its allocation, spending and cutting to support key strategies. 
  • Performance: The Operating Budget reflects how well responsible parties meet their budget targets. This can promote budget management in their self-interest. Strategic goals encourage innovation and accountability.
  • Flexibility: Where Operating Budgets are firm and horizontal, Strategic Budgets anticipate and promote flexibility and change. Budgets need to respond to threats and opportunities. If, for example, a non-profit sees a decline in the economy, it needs to adapt to a reduction in anticipated donations. 
The linkage between operations and strategy is largely a management process and model. The linkage in form and idea is readily seen in business operations. Small and mid-sized non-profits are rarely acculturated to the process and thinking. Locked into the discipline of Excel or similar spreadsheets, they are not as likely to design, integrate, or reconcile separate sheets to reflect allocation priorities, performance measures, and flexibility. 

Solutions

There are low-cost software solutions linking strategic and operational budgets. More important are the programs that you can customize to your non-profit needs. There is simply no Excel or QuickBooks solution to the direction your want to take and the challenges facing your non-profit. Look for the product that come with the advice your need.

Impact Management - Performance Management for Nonprofits

 

Impact Management for nonprofits

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

  • Operational planning

  • Consolidation and reporting

  • Scenario analysis

  • 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. 

 

A Perfect Imperfection - Enterprise Performance Management Secrets

 

Enterprise Performance Management Secrets

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.

In summary…

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.

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