Non-profit budget season: The old Texas Two Step


The other day I received an email from an old friend asking me to share my thoughts about the “right way” for a non-profit organization and its board to construct a budget. Do you start with revenue projections and develop the agency’s fundraising plan first? This way everyone knows what the expense budget can’t exceed. Or do you start with the expenses and try to build a revenue budget that supports the organization’s mission, vision and programming?

My first thought when I got this message was: “OMG! It is budget season for many non-profit agencies. Ugh . . . it is almost October. Where did winter, spring and summer go?

My second thought was actually more of a chuckle because I’ve always thought of budget season as a bizarre dance between board and staff that resembles something like the Texas Two Step as demonstrated in this YouTube video.

For the record, I don’t think there is a right and wrong way to undertake budget construction. There are obviously very smart people who reside in both camps — revenue first vs. expenses first. When I was an executive director, I tried to do the uncomfortable thing and sit on the fence.  Ouch!

budgetThe following is a thumbnail sketch of what my process looked like:

  • I put the budget process in writing with a narrative description and timeline, then built consensus around the importance of following process and adhering to deadlines.
  • I simultaneously started working with the finance committee and the resource development committee.
  • The finance committee and I worked with program staff, and everyone collaborated around constructing reasonable expense budgets with mission, vision and quality programming in mind.
  • The resource development committee and I worked on developing a detailed resource development plan chock full of reasonable revenue projections, range of gifts charts, goals, strategies, volunteer prospect lists, grant prospects, annual campaign prospects, special event prospects, fundraising calendar, and action plans.
  • Sometime in October or November the two committees met jointly. They shared and compared their work. The FUN was just beginning because there was always a gap on the bottom line.
  • Consensus was built and both committees went back to work. The finance committee was usually tasked with finding cuts that wouldn’t hurt the agency’s mission or damage its organizational capacity. The resource development committee went back to the drawing board to find reasonable revenue enhancements.
  • Both committee were tasked with reporting their progress back to the board every month throughout the process. The hard part was staging those board meetings in a manner where generative discussions would happen and result in: 1) board volunteers who didn’t sit on those committees an getting and opportunity to weigh-in and 2) both committees getting an opportunity to engage the larger board in decision-making focused on strategies and tactics (esp. those related to revenue generation).

When the committees converge in the process, the age-old Texas Two Step issue would always float to the top. Do we close the gap with budget cuts or revenue enhancements?

My philosophy was always “revenue first” because I felt like the mission of the organization called upon us to make that attempt first. However, this doesn’t entail just changing projections and modifying our best guesses. It involved adding more prospects, tweaking strategies, and adding revenue streams.

Some years I won this argument. In many other years, I lost this argument, and the finance committee would produce their hatchet. (I am embarrassed to admit that one year I lost the ability to send donors a newsletter thanks to that hatchet. I should’ve fought harder because donors need to see what their investment is doing.)

Ahhhhh . . . You gotta love the old Texas Two Step.  🙂

As I sat on my couch and texted back-n-forth with this old friend, my mind wandered (as it tends to do) and I had a third thought:

If you like sausage, you don’t want to know how it is made!

making sausageI am not suggesting that my process is the right way to put a non-profit budget together. However, I do believe strongly in the following few budget construction principles:

  1. Budgeting is a collaborative activity between board and staff. (Avoid a situation where staff puts it together and the board either behaves like the two Muppets who sit in the balcony or simply just rubber stamps it.)
  2. Projection of numbers (esp. revenue) isn’t a dart throwing activity. It is rooted in historic data, trends, actual prospect names, and strategies. Don’t ever use “plug numbers“.
  3. There is a process with an explicit timeline. It is written out. It is created collaboratively and agreed to by all parties.

Enough of my waxing poetic about how your non-profit should tackling budget season. Here are a few online resources and documents that I found:

Is your organization in the middle of its annual budget construction process? What works for you? What doesn’t work? What do you plan on doing differently next year?

Please use the comment box below to share your thoughts and experiences.

Here’s to your health!

Erik Anderson
Founder & President, The Healthy Non-Profit LLC
www.thehealthynonprofit.com 
erik@thehealthynonprofit.com
http://twitter.com/#!/eanderson847
http://www.facebook.com/eanderson847
http://www.linkedin.com/in/erikanderson847

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About DonorDreams

Erik got his start working in the non-profit field immediately upon graduation with his masters degree in 1994. His non-profit management and fundraising experience numbers nearly 20 years. His teachable point of view around resource development is influenced by the work of Penelope Burk and those professionals subscribing to a "donor centered" paradigm. Donors have dreams and it is our responsibility to be dream-makers because donors are not ATMs.

Posted on September 19, 2013, in Board governance, Fundraising, nonprofit, resource development and tagged , , , , , , , , . Bookmark the permalink. 1 Comment.

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