Budgeting for all businesses, including not-for-profits, can be a daunting task even with all economic conditions being ideal. The personnel responsible for the fiscal task of creating and monitoring an organization’s budget often spend a significant amount of time and effort, only to realize that when economic conditions take a sudden and dramatic turn, their original efforts hold little value under the new economic environment. Under volatile conditions, budgets and forecasts can change from month to month or even week to week in extreme cases. Therefore, the need to establish reliable dynamic budgets that have been pre-approved and can be quickly implemented when changes occur, has become an increasingly important skill for fiscal managers so that budget modifications can be timely initiated when economic conditions suddenly change. These are some approaches you may find useful when budgeting in a down economy.
Scenario Budgeting
During more stable economic times, budgeting is a typical exercise done and set with minor updates throughout the year. However, when the economic conditions are negatively impacted and uncertainty in funding becomes a concern, the importance to budget with the intention of different scenarios will help in decision making on the fly. With the growth in technology and software applications such as MS Excel, the capabilities of these software applications are typically grossly underutilized by users and can be very effective in the dynamic budgeting process. Creating worst, stable, and best case scenario budget models can help the fiscal management of your organization pivot and be ready to make impactful changes to hedge any negative outcomes of an economic downturn. Include trigger points or benchmarks that would need to be met for management to determine when to switch to and implement one of the established and pre-approved budget scenarios.
Budgets in today’s economic environment need to be fluid and not as concrete as what budgets once were. As we saw, and continue to see, during the Covid-19 pandemic, when businesses were shuttered by the closedowns, economic opportunity came in the form of government spending, grants, and programs such as the PPP, ERC, and other Cares Act funding which your organization may have been able to take advantage of. Budgets needed to be updated quickly to factor in this funding and set any contingencies necessary to spread the use of these funds out to minimize impact in the future once CARES Act funding dried up. This is just one example that all businesses had to deal with because at the beginning of 2020, budgets were set with no real thought of having a world-wide shut down of the economy.
Define Your Inputs
In creating your budget, hopefully through some easily manipulatable format using excel, google sheets, or something comparable, it is important to define the inputs of your budget. Such inputs could be projected number of consumers, percentage increase or decrease in funding, percentage increase of salaries to employees, etc. These inputs should be linked to your overall budget to determine the impact of the major areas of the budget. When the inputs change throughout the year, so should your budget to be able to analyze the overall impact at any time. The various programs or segments should be regularly providing real time statistics to fiscal management which overall drive revenue and expenses. CFOs and top-level management need to understand the inputs, the regulations surrounding their funding streams, and the fiscal impact and they need to act like a emergency room doctor or nurse, constantly measuring the vitals of the organization to constantly maintain the organization’s fiscal strength.
Quarterly Budgeting
Budget to actual should be monitored timely and accurately at least quarterly. However, during an economic downturn or other fiscal crisis (i.e. significant drops in fee for service volume, decreased fundraising, stock market declines, etc.) you should do this monthly and periodically check in with the management of each of the organization’s segments to ensure everyone is on the same page. Technology has given programs and businesses the ability to obtain data in an instant, so now more than ever these tools should be implemented to gather the data necessary to compile an accurate update to budgetary numbers on a macro and micro basis for your organization. Setting percent thresholds of unexpected changes to line items and overall budget numbers should trigger flags to fiscal management which could lead to insight into trends in spending and allow for action to be taken if needed. Quarterly budgeting should also include a cash flow forecast of the short-term and long-term cash needs of the organization. Should something change in the budget, what are the cash flow impacts of that change, and how do we hedge that change so it does not negatively impact the organization fiscally.
Budgeting in an economic downturn can be difficult, but with the right tools in place it can reduce the stress and burden on fiscal management to make impactful timely decisions by using a dynamic budgeting style that includes, scenario budgeting, clearly defining the inputs that drive your organization and how they impact your bottom line, and regular quarterly or more frequent budgeting. If the past 2 years have shown us anything, it is that sometimes we need to be at the ready to pivot and continue marching forward to a better tomorrow. For businesses, especially not-for-profits the uncertainty has led to organizations having to be more creative and emphasize the importance of fiscal budgeting not just annually but throughout the year as well. Not-for-profits are a resilient bunch and have always figured out ways to be impactful through their missions. This same mindset should be implemented with respect to the budgeting process to ensure that your organization’s fiscal strength matches your organizations programmatic outcomes.
Albert Borghese, CPA
Director
Albert is a member of Cerini & Associates’ audit and consulting practice where he focuses on serving the firm’s special education and nonprofit clients. Albert is also involved in the marketing and development of the firm, and frequently participates in recruiting efforts, and research.