Which Comes First: The Budget or the Plan?
It’s an old adage: Which came first, the chicken or the egg? I admit to not knowing that answer, but in this blog I will answer which comes first regarding an association budget and strategic plan.
Every year, your finance team (be it staff, volunteers or a combination of both) prepares a draft budget and brings it forward to a designated group of leaders for approval. It’s not uncommon for that draft budget to be based largely on historical trends, known existing contracts (e.g. event hotels) and cost-of-living rates (AKA cost-based budgeting). If it is a complex budget being presented, it is easy to get caught up in the those numbers, conclude that it all makes sense and cast a vote in favor. However, even in fairly small budgets, historical spending may not be an accurate prediction of the future. For example, if there will be a big marketing effort to recruit new members in the coming year, but the historical spend on marketing is very small, historical spending will not be a good predictor for your next budget.
That’s why consideration of the strategic plan is crucial to the budgeting process. The strategic plan is a guide to help an organization accomplish its mission and goals. The budget should be a reflection of the funding necessary to carry out the tasks and actions to achieve the desired outcome. If you consider the origins of an organization, the founders did not start by saying “we’re gonna need $xxx,” but rather articulated a vision and then laid out the plan for fulfillment. So by design, the plan comes first.
The very first budget for an organization is typically a “zero-based budget” (ZBB), in which each cost is justified against a specific goal. Preparation of a true ZBB is more complex and time-consuming than cost-based budgeting, so it may not be feasible to perform every year. A more practical approach would be to get as close to a ZBB as possible given current strategic objectives. This will require committees and task forces to put forth reasoning for expenses, estimates for revenues and a timeline for accomplishment. If there is insufficient justification, the program may need to be discontinued (kill that sacred cow!).
The projects/programs that are aligned with the plan and have been approved should be monitored with the timeline in mind. This can be accomplished by periodic reviews of the budget to actual results, progress reports from committees, and alignment of meeting agendas with strategic objectives. The plan should be reviewed each year during budget preparation. Then the budget should get updated based on new, ongoing and accomplished objectives. A more thorough ZBB approach should be taken approximately every five years.
So when considering a budget, be sure to start with the strategic plan as the guiding star and have the budget reflect the objectives of that plan.
2020 is just around the corner. Start off the new year on the right track using our free strategic planning e-book: How to Prevent Your Strategic Plan From Failing.