To illustrate, I am going to lead with an oversimplification nearly as egregious as the one I just denounced. Take this example. If my organization has a $5 million budget and we are losing $500,000 a year, then wouldn’t shaving $500,000 in costs be the simplest way to balance my budget? And wouldn’t making ten percent cuts in expenses across the board be the fairest way to do this – treating all salaries, programs, and administrative items equally? Unfortunately, instead of solving your problem, this approach could leave you with a $4.5 million budget that still generates a yearly loss of $450,000.
While you may be scratching your head at the math, consider this – if you knew that a particular program was a financial winner, would it be wise to cut its staff and resources by ten percent? Might you have just decreased its effectiveness and profitability by ten percent as well? If you knew that a program was a serious drain on your organization, would you cut its expenses only ten percent to preserve parity with the other departments? Wouldn’t this inadvertently maintain its drag on your bottom line?
To take a bolder approach requires better information. Which of your programs is generating the most revenue? What are the financial drivers? Do you receive fees from clients that increase with each unit of service provided? Do you receive reimbursement from a government agency for each client served? Do you receive additional foundation grant support for each new policy initiative related to a particular issue? For each funding source you have, there is a driver tied to an input, an output, or an outcome. Knowing what triggers your organization’s money flow is key to knowing where to deploy your resources. Answer the question about financial drivers first, and you may find that even in difficult financial circumstances you would be wise to spend more in certain areas rather than less.
On the expense side, accurate information may help you overcome emotional and historical attachments to programs and services that are no longer viable. Phrases like, “but we’ve always provided that service to the community”, or “that’s the thing we’re known for” can tug at our heartstrings and simultaneously drive our organization to insolvency. Our real hope is to know the facts. The truth is a powerful financial tool. We need to know that our administrative and other shared costs are properly distributed to our programs, and that our accounting is designed to report true program costs. We also need to know that our financial and accounting systems are up to the task of gathering and reporting the truth. When we find a program area that is not financially viable, we need to be realistic about whether to keep subsidizing it or close it down altogether. One important caveat, of course, is that financial results are only part of the consideration when deciding how to allocate resources, but sometimes nonprofits need to start with fundamentals to assess the comprehensive business model.
In this season of budget debates, be sure that your organization isn’t falling prey to simplistic formulas or knee jerk reactions. If your financial infrastructure doesn’t provide reliable information, do what you need to shore it up. Then rest assured that your informed and sophisticated approach will guide you to a proper budget and a sustainable organization.
Photo CC: Kaiserb