“Well, OK, but let me ask you a question now. What makes you think that just automatically we can project any kind of revenue forward? What am I supposed to do, be the magician around here and make the dollars magically appear? There’s too much uncertainty.”
“Ok, Terry, let me spell it out for you and be crystal clear. Here’s your last year’s financial final and your budget for this year. There are certain things in this budget, on the expense side, that are going to remain fairly stable for the foreseeable future, right? We’ve got our essential operating and administrative basics, right? Rent, utilities, those kinds of things. If we stay here in this building, there’s not going to be much change, right? OK, so project that section out with the cost of inflation considered.” She was wondering why it was so necessary to go into this much detail with a guy who had been a financial wizard at Gimmicks and Gismos Corporation for fifteen years before coming to the nonprofit sector. She was really getting irritated that she had to practically do his job for him and then stick his nose in it.
“Then take programs,” she continued, trying to soften the edge of her voice a bit. “What do we have to do by way of new projects, programs and added staff to make our goal of 40% market share over there? If you work with me on this I can probably tell you some pretty accurate numbers after I get with Sally and Herb in the program department. Or you could take that step yourself. Why do I need to get involved?” Immediately the words were out of her mouth she knew she shouldn’t have said that, but she went on, hoping that her morning coffee wasn’t going to let her betray her total irritation too badly.
“Then take fundraising. Our cost to raise $1 has been about 25 cents over the past five years as we’ve raised about $1 million each year. If we continue that, and we’re raising ten times as much money, what’s the projection for the total costs of fundraising? As we raise more money we should be getting more efficient, so we should probably project something more like 15 cents on the dollar and see what happens. How much more staff, how much more time, effort and dollars will it take to raise $10 million. If you talk with Jared, he’ll likely be able to tell you. Come on, Terry, I know you can do this. Will you work with me on this?”
“But what about the state portion of the revenue side? We don’t’ know from year to year how much they’ll give us.” It was one last hold out, he’d try it and see if it worked. He didn’t like the direction this was going. It was too risky, it didn’t have any solidity at all. He would be flying by the seat of his pants. What if someone looked back on his projections later and saw that he was wrong, that what he had projected really didn’t turn out to be true, they could hold him up to ridicule, and some on the Board were all too ready to do that anyway.
Terry knew that things changed so much within each year that every annual budget had to be adjusted, then re-adjusted all during the year. And at the end sometimes one would not recognize the budget they’d started with. The one thing he would give Mary is that she had the ability to roll with the punches and had brought every year out ahead of budget so far. Maybe she was right, but it was a scary place to be from a finance officer’s point of view.
But Mary persisted. “The state is the state. Nothing we can do there. Get a trend line and project it out as it is. They’ve declined about 5-8% over the past two years. If you don’t think they’re going to actually fix the problem, all we can reasonably do is project that trend to continue. If that does continue, what will the state’s share of our revenue picture look like? It’s simple, really, Terry.” She was ready to make one last try.
“Tell me, Terry,” she said, with more equanimity that she felt. “What’s the problem here. You seem to be determined to resist this, and I need you to know that I see projected budgets as essential to our meeting the strategic targets set by the Board, and I’m determined to see that we get there, and I believe this organization can do what they’re asking. So, tell me, what’s with it with you? What are you afraid of?”
“Very simple,” said Terry, taken briefly off guard by her suddenly conciliatory tone of voice. “If I project income or expenses at a certain level, then, quite frankly, I expose myself to criticism if whatever I project out there doesn’t actually happen. There are people on the staff and people on the Board who are all too ready to use my own tentative figures against me to try to make it seem like I’m the bad guy. I’m not going to put myself in that kind of position. You want projections? I suggest that you take the responsibility for those figures and leave me out of it. I’m content to work on what’s really coming in the door and going out on a day-to-day and week-to-week basis. I can tell you where it’s at now, and where it went. But don’t ask me to project what’s going to happen in the future around here. It’s too volatile, too uncertain. And the Board has a tendency to forget that when they’re looking for someone to blame it on.”
There, he’d said it, at last! That sharp tang of the tannin came back to him as he realized it couldn’t really be a good day until he’d sacrificed to the gods, and that now he’d done that by ripping open his inner thoughts for his CEO to see, maybe he could get on with the day.
Mary was relieved, too. The solution was simple. “OK, she said. Let’s do it this way. You make the budget projections as if you were me – whatever you think I’d do. Then give the file to me and I’ll take a crack at it. Then we’ll get back together and you can give me your opinion of what I’ve done to your figures. We can discuss the issues together. But ultimately, I’ll say to the Board that this is my projection and I’ll take full responsibility for it. Does that suit you?”
Terry nodded his ascent. “I’ll have it for you tomorrow morning.” And at that moment Stella came in to remind Mary that her next appointment was waiting already 10 minutes and she was late.
“Thanks, Terry,” she said. “I’ll look forward to your projections tomorrow,” and she left the room as airly as she had come in.
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4 comments:
Eloquently detailed and compelling in the use of metaphor and vivid tactile imagery. But let's boil this scenario down to brass tacks - it's REAL!! And what makes it believable? Well, here's an undertaking that requires the input and expertise of host of actors, taking place in the confines of an office between the two individuals with the LEAST to contribute to the process.
If I was this finance officer, I'd be equally "reluctant." The key error in thinking inherent in the discussion - and one made with such regularity as to become the conventional wisdom - is that budgeting is a FINANCIAL function. To the contrary, budgeting is an operations function facilitated by a financial professional. And not only does Mary want Terry to forecast the financial picture a decade down the road, but on top of that she wants him (at least initially) to forecast HER VISION!! Then the negotiation takes another all-too-real turn when Terry essentially concedes that his real reluctance stems not so much from the daunting task of forecasting so far into the future, but from the jeopardy he feels like he'd be putting himself in if things didn't pan out.
Let's change the conversation - here and in our own organizations. First of all, let's broaden the scope of participants in the process. Second, let's hold our financial staffers accountable for providing simple, understandable, comparative reports for the last three annual fiscal years, complete with analytical narrative about what occurred, changed and contributed to the results (positive or negative) within those years and over the course of the successive years. Third, collectively, let's look at those trends and assess how those factors that contributed to those fiscal outcomes over the last 3 fiscal years have changed. Have trends reversed, accelerated, flattened? Has our service delivery structure changed meaningfully? Have we been able to leverage technology to more effectively respond to the ever-growing administrative requirements permeating the nonprofit landscape? Fourth, let's assess the trends in giving to our organization. How have we fared in the individual, corporate, foundation and government categories? Are we zeroing in on some major donors, or still "friend-raising" through the ubiquitous golf outings and recognition dinners? Fifth, we do need to give proper weight to the vision articulated by leadership - specifically the Board and CEO (and sometimes COO, CFO, CIO and CDO). If the goal is to be ten times larger on a revenue basis 10 years from now, we'll need to forecast about a 30% annual growth rate. Okay; great target. Now, operations, development and finance, how do we get there?
Sounds like you're inviting an actual face-to-face conversation between the key players, Bob. What a concept!
And maybe that's why we don't do more of this in our real-life situations -- it takes time. It takes a little research. It takes some thought and not a little preparation. If we're going to do this work of projecting out budgets for a decade, then we've got to give it some administrative time, and that's a tough call in already over-loaded shops.
How do you handle that kind of block in your organization? Do you make budget projections part of the budget-building process? Or how does this happen for you on a regular basis?
Like most things worth experiencing, it does take a commitment John. And it is especially challenging when confronted with the imbalance between needs and resources to meet them. But let's step back from the budgeting/fundraising focus and shift for just a second to the construction trades. Now being no handyman myself, I can confess a certain mystical element to the most basic home repair. But one fundamental rule sank in for me the first time I heard it, because it was so simple and so profound all at the same time: Measure Twice, Cut Once. The same holds in the scenario we're talking about.
Rather than limiting participants for the sake of expediency (ie measuring only once and then cutting), let's invest the time and craft a budget that requires less maintenance in terms of adjustment and explanation into the future. I'm advocating for a position somewhere between 2 people and the whole company. Both carry pitfalls and value-added trade-offs between input and outcome. But at least one key player from operations, IT, HR and facilities should probably be involved. And additional participants could be added based on size and complexity of the organization. I'd go so far as to assert that most organizations know intuitively who the participants should be.
Beyond budgeting, what you're almost certain to find is that everyone comes away with a deeper, more meaningful understanding of the organization as a whole. And this in and of itself fosters a healthier organizational culture and is worth the effort expended.
I certainly do like the outcome you're suggestion, that everyone has a better understanding of the whole organization and how it functions, as well as just its financial picture.
What role do you see the Board of Directors playing in this process, and how would you define the role of the CEO? These are two areas in which, on a practical, day-to-day basis, I find there are blocks and barriers to overcome. First, getting their attention, then wading through all the objections about "inability to project beyond this year" and then about "wasting time when we have more urgent matters before us." That kind of think. You've heard it all.
How do you break through this to get a budget building process like you're suggesting started?
John
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