BUDGETING

Part 3—The Role of the CFO

THE CFO IS THE BUDGET DIRECTOR

A nonprofit will have the most success in budgeting when the CFO takes the role of Budget Director. What are the attributes of the perfect budget director?

  • Shares management and staff’s passion for the mission with a solid understanding of the organization’s programs
  • Skilled arbitrator and negotiator
  • Thorough knowledge of GAAP (Generally Accepted Accounting Principles)
  • Skilled project manager
  • Hands-on experience producing a budget from start to finish in all its excruciating detail
  • Skilled in preparing and presenting a budget package

In a smaller nonprofit the CFO may not yet have acquired all of these skills, but my point is that a successful budget process is a coordinated and collaborative process, not a hastily assembled collection of numbers.

BUDGETING IS PROJECT MANAGEMENT

Project management is largely about relationships. That means understanding the needs of the individual team members and meeting each of them on the part of the playing field where they feel comfortable. Project management is also about overseeing the minutest details on the ground, while keeping the 30,000 foot view in mind.

Let’s see how all this plays out.

The All-Important Goodwill Account

I have found that the conflicts you as the CFO might encounter are minimized when you demonstrate your commitment to the team on a daily basis.

A few examples:

  • Develop sincere interest in and respect for the mission of the programs.
  • Put your heart and soul into helping the programs achieve cost savings wherever possible. I recommend annual meetings with vendor representatives to ensure the most advantageous contract terms in areas such as utilities, office equipment, and telecommunications, and to look for new vendors when necessary.
  • Enthusiastically support fundraising efforts.
  • Solve day-to-day transactional problems quickly.

You do these and similar things because it’s your job, but the result is a goodwill savings account that will get you through a tough budget cycle.

The Executive Director

A budget is not a budget until the ED (and ultimately the board) approves it, and the CFO is the eyes and ears of the ED throughout the budget cycle. When the CFO and ED work together as partners, the CFO understands and empathizes with the ED’s hopes, fears, and dreams. The final budget will reflect the ED’s priorities which might include limits on individual cost centers’ deficits, creation of reserves via an unrestricted surplus, collaborations between programs, new infrastructure, or other strategic initiatives.

At the same time that you are knee-deep in overseeing scads of details and attending to many people’s needs, you are acting as the ED’s agent. You want to keep the ED involved so that midcourse corrections can be made. What you don’t want is to present the ED with surprises late in the game. Here are some suggestions.

  • If you and the ED meet regularly, report on your progress and let them know about the budget issues of the moment; invite them to step in if a particularly challenging situation has emerged.
  • Make sure that all new positions or other changes in staffing are officially approved by the ED early on.
  • Request that a budget update be a standing agenda item for any regular executive management meetings.
  • Hold individual, formal review meetings with the ED and the program managers when the draft budgets are where you want them, leaving enough time for revisions before the next milestone. (You will not do yourself any favors if the schedule forces the ED to rubber stamp the budgets!)

The Board and Finance Committee

The budget is often the most important document that the board relies on to carry out their fiduciary responsibilities. The board’s priorities are expressed at board and committee meetings and discussions with executive management. Any decisions made as a result of high level strategic planning activities must be incorporated in the budget.

While the ED carries the biggest load in understanding and carrying out the board’s wishes, the CFO usually has a close relationship with the treasurer and the finance committee. If the treasurer is not an active participant throughout the budget process I recommend giving them the opportunity to thoroughly review the budget before it is brought to the finance committee.

Your Staff

If you are a finance department of one, all of the principles discussed here still hold, but your processes may be somewhat informal. If you have staff accountants, however, they will probably do a lot of the work. They will depend on you for guidance and support and you will include them in decisions about how, when, and where budget work is to be done. If they are collaborating with program managers on their budgets you will stay in close contact and perhaps even join in their meetings on occasion. You will have a thorough understanding of the tools the staff are using and be there for them when software misbehaves.

The Program Managers

Helping the program managers optimize their budgets was one of the most rewarding experiences for me as a CFO. I understood that every manager has a different approach to numbers and not all enjoy working with them as much as I do. I always tried to see their point of view while fostering a team approach to budgeting.

Without a doubt, the budget director walks a tightrope. Let’s look at a hypothetical human services agency where the ED wants to build a reserve; this can only happen when unrestricted surpluses are achieved. In this example the food pantry is historically underfunded and often experiences deficits. But the outpatient mental health clinic is anticipating third-party payer rate increases along with increased demand for services, and is therefore looking at a good-sized unrestricted surplus next year.

There are a number of potential challenges here. The food pantry budget must be realistic, but knowing that the ED is looking for surpluses, the manager might panic and attempt to unrealistically bump up contribution revenues or neglect to add an inflation factor to food expense. The clinic director, on the other hand, might want to take this opportunity to give salary increases or buy equipment.

As the budget director, the CFO’s job is to bring everyone together to work towards the common goals of meeting the mission (keeping the food pantry open) and building resources for the future (budgeting an unrestricted surplus). The clinic manager needs to understand that the additional revenues are not available for additional spending because some or all of the surplus is needed to help with the food pantry’s deficit and/or to build a reserve to secure the future of the whole organization. Managers often are not enthusiastic about “bailing out” other programs, and depending on the dynamics of your organization, this might be the time for the ED to take the lead on the conversation.

The same goes for communications with the food pantry manager. They need to know that their program is not in danger; the service is critical to the organization’s mission, and all reasonable steps have been taken to operate efficiently and seek additional revenues. Perhaps the ED should deliver the message that the current mode of operations meets their expectations both programmatically and financially.

While keeping in mind your empathy for the program managers’ challenges, you also need to keep a close eye on the numbers that they are inputting into the budget worksheets. Take as much time as you can to review budget drafts as they become available and ask yourself:

  • How does next year’s budget compare to the current year budget?
  • How does it compare to the year-end forecast?
  • Can you explain large increases or decreases in revenues and expenses?
  • Are revenue assumptions reasonable and supportable?
    • Be wary of budgeting for grants that have not yet been awarded.
    • Look carefully at the expected revenues and expenses for new fundraising initiatives.

You are looking for mistakes, faulty reasoning, and/or bad assumptions. Program managers are subject to human failings like anyone else and may on occasion put numbers in their budgets that you don’t agree with.

I recommend meeting with each progam manager (and their program accountant if they have one) to review each cost center budget prior to the ED review.

HOW DOES THE BUDGET DIRECTOR SPEND THEIR TIME?

Calendar

I always kicked off the budget season by creating and disseminating the calendar, which usually covered a six-month time span. The calendar is a collaborative process designed to obtain agreement on the milestones from every player from the executive director on down.

Enforcing the calendar from day one is a must. The first tasks will probably be assigned to you and your staff and you had better meet your deadlines if you expect anyone else to!

Here is an example of a calendar.

The Tools

Looking back on my CFO experiences, I can’t think of a time that I got more people mad at me than the year that our budget tools were cumbersome and faulty. For this reason I highly recommend closely overseeing the work of preparing the master budget template and the year-end forecasts on the cost center worksheets. Make sure you are satisfied with every one of these before they are released! (Descriptions and examples of these tools can be found here.)

Payroll

Payroll is so crucial that the CFO should plan to spend time personally checking and double-checking the payroll worksheet for accuracy. One position inadvertently doubled or left out will have a material impact on the overall bottom line. Some ideas:

  • Before populating the worksheet make sure that every formula is correct.
  • Compare each cost center’s budgeted headcount to its current headcount and reconcile the differences.
  • Ensure that all new positions are approved by the ED.
  • Have the program directors take special care in reviewing their payroll budgets:
    • Ask them to review all cost centers periodically and just before the ED review.
    • Require a final sign-off on each cost center by the responsible manager before the final presentation to the board is prepared; keep these on file.

Shared Cost Allocations

Shared costs are spread to the cost centers in the budgets just as they are for the financial statements. Mistakes are easily made and the temptation to take shortcuts for expediency’s sake is ever present. The allocation of an administrative assistant’s or program supervisor’s time must be reasonable and justifiable. If the basis is time spent, that’s fine, but you need a workpaper that shows how you calculated the numbers in the budget and explains in words why the allocation percentages were chosen. Without strict adherence to documentation it is all too easy to solve a deficit situation by reducing a shared staff allocation and moving the excess to a more financially stable program. This is not ok!

The CFO vigilantly reviews the shared personnel allocations for mistakes and ethical lapses.

When best practices are observed, every allocated cost on every cost center budget is documented in a workpaper, and as the amounts change the workpapers are updated.

Overall Budget Review

ED review is a milestone on the calendar, to be followed by finance committee and board review. To prepare for this I would do a lengthy review at both the cost center level and the organizational level. I have described techniques for becoming familiar with the individual budgets throughout the process. Now is the time for the bird’s-eye view. Here are some ideas for reviewing your budget from the top down.

  • Look at a list of bottom lines by cost center and verify that each one matches your expectations.
  • Look at the consolidated budget to be sure that M&G has been fully allocated.
  • Compare total organization revenue and expense for next year’s budget versus current budget or year-end forecast; challenge yourself to explain the differences.
  • Look at the ratio of total health insurance to total wages and compare to current and/or prior year.

These are just a few ideas for building the confidence to assure the ED (and ultimately the board) that all of the moving parts have come together into a coherent whole. To state the obvious: The more time you spend reviewing the budgets the more likely you are to find any errors (big or small) that may have crept in.

We’re not done yet!

I have taken us up to the step of executive director review. We will finish our tour of the budget process with a few miscellaneous topics and a look at the operating plan package to be presented to the board.