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Anticipating the Year: Budgeting

Philip J. Clements

While it is said that non-profits are not a business, business practices do make non-profits more effective.  Budgeting and the planning involved in the budgeting process are tools that all chambers, regardless of size, should strive to master.

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With America's economy in a state of flux over the last few years, preparing chamber budgets has felt like reading a crystal ball.  Member turnover created dues constraints, while the need for programs to encourage the business community created greater demand for programs and events.  Opportunities in the downturn confirm the critical importance for a clear budget that chamber management can utilize for strategic decision making. 

PURPOSE OF THE BUDGET

The budget should flow from a strategic plan created by the chamber.  The budget is normally a part of the first year of the three-year strategic plan.  This tool takes management's objectives and demonstrates in writing how resources should be utilized to achieve those objectives.  As managers allocate resources throughout the year, they must choose between objectives that advance the chamber's strategic plan and those that do not.  If an opportunity is not in line with the strategic plan, it does not belong in the budget.

As the year plays out, a budget keeps the chamber focused.  If revenues are short, the budget gives both a helpful warning and serves as a vehicle to assess what has happened and how to take corrective action.  If revenues are ahead of budget, programs can be stepped up.  Just recently, an organization we worked with that didn't have a budget found in its year-end financials that indeed it had experienced a good year.  Upon discussion, the team concurred that they would have had more confidentce to step up some programs if they had realized that things were going well financially.

While the process of creating a budget is useful, more important is the regular utilization of the budget as a management tool.   Each month, chamber management should review actual results against the budget.  This allows for real-time adjustments of spending and operations and updated forecasting for the remainder of the year.

When economic conditions are less predictable, it is especially vital for each chamber to be aware of cash needs and design best- and worst-case scenarios to mitigate risks.

BUDGETING METHODS

The budget process starts with chamber leadership determining the key steps to implement the plan for the next year.  An annual SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats) identifies areas of the chamber that need to be addressed.  For example, the chamber may decide to implement a social media strategy to increase membership and networking opportunities.  The necessary cash outlay for this initiative becomes part of the funding requirement to be covered from the receipt of associated dues from increased membership.

Several approaches to budgeting have been developed to address the various issues within an organization.   All approaches work, but some are easier to apply.  For example, a small organization may use a different approach than a large one because it requires a higher level of efficiency to operate.  The three typcial approaches inclue zero-based, top-down, and bottom-up (or program) budgeting. 

Usually, the most efficient budgeting method for small chambers is top-down.  Using this method, the senior leaderhsip determines the direction and produces the first draft of the budget, which is then sent to the management team for review.  However, for larger chambers that provide multiple services, a bottoms-up approach can be useful.  Here, all program directors are asked to give the plan and budget for their specific area.  These are then combined with the chamber's overall plans and costs to create a comprehensive budget.   This added approach increases chamber executives' awarness of specific plans, fund usage, and possible opportunities for expansion or reduction in services.  It also helps to get buy-in of the various program directors.  Overall, this approach may prove beneficial to many larger chambers since all directors will have a united sense of completing objectives within their designated budget.

DEALING WITH DEFICITS

For some chambers, the budgeting process could reveal that the organization is operating with a significant deficit.  It is important that chambers work on a means to reduce the deficit with realistic objectives.  Inflating estimations on revenues will only lead to further conflicts throughout the year.

As discussed below, each program should be fully budgeted and costed.  The result will be some programs that have a deficit.  What is to be done?  The chamber will first need to evaluate whether the program is central to the overall strategic mission.   If the program is central, then the program deficit becomes a cautionary warning to manage its costs closely.  If the program is not central, then the program must be evaluated as to whether it is an investment.  Clearly, if the chamber has an overall deficit, then a non-central program cannot be continued, even if it is considered to be an investment.

SPECIFIC BUDGET STEPS

Heres the budget process that we recommend:

Revenues:

1. Review prior year revenues month by month and establish this year's revenue target.

If a three-year financial forecast has already been developed as part of the strategic plan, the first year's revenue target can be transferred from that plan.  It should then be adjusted for such factors as the current economic situation and seasonality.  Based on these adjustments, revenue should then be allocated on a month-by-month basis. 

For example, if the 2011 revenue target is $1 million up from $750,000 in 2010, that represents a 33 precent increase.  If July 2010 had revenues of $75,000,  then the budget for the same month in 2011 should be $99,750.  If event income always dips in July due to lowered attendance at events, that month's revenue should be reduced accordingly.  Thus if July 2010 had only $40,000 in gross revenues, then the 2011 adjusted numbers would be $53,200 for the same month. 

2.  Tie funding/revenue targets to the chamber's operating strategy.

Review existin member and sponsor bases to identify places where additional revenue might originate for the coming year.  The increased revenue may come from current members/sponsors, price increases to the current base, or through new service offerings.

Budgets should have some level of "stretch" (the target revenue beyond the known achievable revenue).  This stretch, called a "gap," needs a strategy to fill it.  The chamber needs three different strategies for how this gap might be filled; for example, it might increase the number of members, the number of average paying attendees at chamber events, or the sponsorship opportunities.

A number of chambers have programs with government funding, which can be difficult to accurately forecast without specific grant information.  Everyone has heard horror stories about governemnt budget cuts that wiped out organizations.  Given the state of various government finances, caution remains the word of the day. 

Expenses:

1.  Evaluate line by line to determine which items will increase as revenues grow.

There are several key expense categories to review, beginnning with personnel cost.  If compensation is growing, identify the reasons, such as additional hires, added benefits or premium increases, or raises due to increased responsibilities for current staff. 

Following a detailed review, examine the top three costs to determine if there is a way to more efficiently manage them.  For example, the implementation of electronic communication strategies for members may eliminate a large portion of printing and postage costs.

2. Test for expense growth given revenue growth using a percent of revenue.

For example, if 2011 projected revenue growth is 25 percent, be sure that expenses are not growing in any area by more than this amount, including compensation.  If the percentage is higher, this demonstrates either a problem or investment that needs to be addressed by management. 

BUDGET VS. FORECAST

A budget is the chamber's year-long goal for both revenues and expenses.  It does not change as the year progresses.  It should be compared to actual revenue and expenses on a monthly basis and any differences explained.  This explanation in turn helps the chamber to respond to market conditions (positive and negative) and fine-tune forecasts for the next quarter and year to year. 

COST ACCOUNTING IN THE BUDGETING PROCESS

The core concept in cost accounting is tying costs to activities so that management can evaluate the merit of an activity.  For chambers with multiple activites, cost accounting allows for better budgeting.  Each activity should have an appropriate tracking of costs. 

Chambers often wrestle with the allocation of general overhead to an activity.  The chamber has to decide if its dues cover the general operation administration.  If so, then the other programs need to cover only their specific costs.  Usually, chambers will want some contribution to general administration by various programs.  The best way to determine what level of contribution is warranted is by a time-based allocation of administration time and effort.  If a program were to take 10 percent of the administration's time during the year, for example, then 10 pecent of administrative costs would be allocated to the program.  Administrative costs include all costs of administration, not just compensation.

As a chamber puts a measure of cost accounting in place, it must keep in mind that it is seeking better information for evaluation of various costs and programs.  Therefore, a measure of precision can be given up against the capactiy to gain evaluation input. 

Smart chamber exectuvies should always be on the lookout for new ways to streamline the internal processes governing their chamber.  If you have been preparing a budget in the same way for many years, it may be time to reevaluate your methodology and try something new.  The budgeting process can be an enlightening way to learn more about what your chamber can handle financially, to plan ahead for various risk scenarios, and to get a better handle on the strategic decision making process.  To borrow a line for a popular credit card commercial: Time required to plan for, devise and evaluate your budget?  Many hours.  Value of the budget to a chamber's long-term plan and fiscal health? Priceless!

 

Philip J. Clement is CEO of Cathedral Consulting Group, LLC, and a managing director in the New York office.  The company provides operational and management consuting for small businessed and non-profit organizations nationwide.  Webinars and resources are available on the company's website, www.cathedralconsulting.com.  Clements can be reached at pclements@cathedralconsulting.com or (917) 623-1840.

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