Creating and Managing a Budget

Beth Flambures
This article provided by the Engstrom Institute

How can you unleash your ministry's potential? The annual budget doesn't seem a likely place to start, but there are steps you can take to make your budget and ministry more credible. It starts with getting others in your organization to take ownership of their budget numbers, setting them where they feel they can manage them best throughout the year. It also involves using the annual budget as a financial scorecard to gauge your progress in meeting budget goals. Finally, it will allow you to make room for new projects that expand your ministry's outreach.

There are two aspects to developing the budget. Listed below is the first aspect, or steps to follow in setting up a budget. A separate aspect of budgeting is managing it throughout the year.

Why Set a Budget

Plain and simple, you set a budget because it is required. You work with grants and donors, and they want to know that you are being good stewards of your resources. A budget allows for financial credibility outside of the organization. It is also the tool through which departments within your ministry become accountable to the organization itself. Finally, a budget helps you in your planning.

Don't Change Your Destination

Once you've got your annual budget set, think of the numbers as your destination. For example, you start the year "here" and your destination at the end of the year is "there." These two points—"here" and "there"—should remain the same throughout the year. Your numbers are established, and approved by the board. They are there for a reason. Keep them. You may not meet those numbers for the year, for a variety of reasons. Still, it is important that you not change the numbers to reflect any roadblocks that come along during the year. Otherwise, you will have no way of evaluating your progress against your set budget goal. Your destination becomes synonymous with your budget, even if things change.

Roadblocks Happen

Roadblocks will emerge enroute to your destination. For instance, your path might be altered because you have learned of increased or decreased income, or increased or decreased spending. But the goal remains the same: to have your organization get to its destination. As you set your budget for the year, build on the past so you can get to your future. This will allow you to actually work your way around the roadblocks.

What Type of Budget Should You Use

There are many types of budgets, but the one most suitable for a budget that doesn't change the destination is the modified-base budget. This is the middle ground between an incremental budget and a zero-based budget. Below are simplified definitions of all three:

• Incremental Budget: In this style, your budget stays the same from the prior year and a particular percentage is added for the next year, but only to existing projects or departments. For example, if Department A had $100,000 last year, and the percentage increase is 10%, this year Department A's budget will be $110,000. Many organizations are moving away from an incremental budget because it doesn't have a lot of accountability. It is also a tough budget to work with if you are a changing ministry because it doesn't accommodate adding in new projects. What tends to happen is that existing departments get more and more money they don't really need. Meanwhile, new projects may never even be considered. This is not practicing appropriate stewardship.
  
  
• Zero-based Budget: This is the opposite extreme of the incremental budget. In this approach to budgeting, everyone starts at zero. Each department determines what they need to spend, and has to justify every single expense, as if it were new. If your ministry is new, this is probably a good budget approach because it puts everything on a level playing field. It allows you to define your ministry, choosing one program versus another. Zero-based budgeting can also be a great tool to use periodically if your ministry has been around for a long time. You have to start from zero and justify every single dollar to the executive team or board. But, for an established ministry, it can be a lot of work that is probably not necessary, since it requires a lot of research for programs you know will stay.
  
  
• Modified-base Budget: The middle ground between the Incremental and Zero-based budget is the Modified-base budget. In this type of budget, consider the programs that are established and will remain. They become your base budget. New projects are then added to your base budget, as in an incremental budget. But instead of increasing percentage dollars, projects get added. This is a great tool for growing your ministry because it allows you to maintain historical programs while adding new ones. It's a nice mix between Incremental and Zero-based budgets, allowing for forward thinking. You won't get stagnant doing the same thing you've done for 35, 40, 50, or 100 years. You can move on and hold on to that historical aspect you have done well for so long.

Gathering Information for Your Budget

Once you've decided what type of budget you will use, you need to gather information for setting that budget. The following are some considerations.

1. Be sure to refer to any applicable board policies related to budgeting. Perhaps the policies are general, but a board usually sets the overall destination of the organization. Remember, your budget is your destination, so you need to make sure you follow the board's lead.
   
   
2. Engage your finance committee or your executive team even before your first budget draft. Meet with your executive team, but don't talk about numbers. Talk about strategy. Talk about what they are thinking of doing next year, what needs to be looked at and reevaluated. Then create your numbers—your first draft. Engage the finance or executive team from the first draft, since they are going be your final sign off. You will also avoid a lot of modifications, if you include them from the start. Most importantly, they will want to champion that budget when it goes to the full board.
   
   
3. Finally, involve all your department managers. This will help them take ownership of the process and can provide you with invaluable input. Ask managers to share everything they've learned last year—every efficiency and lesson they've discovered. At this point, remember that you are creating the department budgets based on assuming everything stays status quo (the base). Added programs will be the modified portion of the budget.

Determining Which Programs Get Added

Let each department bring their hopes and dreams. There may be 30 to 50 new projects, but probably only 3 to 5 can be added. It may take training of your managers to understand they can bring the projects to you, even though not all of them are going to get into the budget. If management has been engaged and understands what the vision for the organization is for the year, they will start to trim down the lists of hopes and dreams.

Still, let them bring you the list. It can help you see what's happening in your departments. You can see what managers are thinking about, where they are going, and their vision. Don't squash their excitement.

New projects have different justifications, so evaluate them separately outside of the base budget. Very importantly, consider human capital. The tendency is to get really excited about a lot of new projects but forget you still have the same number of staff to accomplish them. You will potentially set yourself up for failure if you don't have enough people to execute the new projects.

Providing a Budget Kit

Develop a budget kit you can distribute in a training session. This will provide a standardized format for managers to give you the information you need. Create simple templates and instruction sheets. Excel templates work well because managers can simply plug numbers into them. If possible, keep the template the same from year to year.

Other helpful information to include in your kits: articles on inflation, articles on whatever budget process you're using, strategic plans, etc. Also, include expense reports from the Finance Department so managers can see what their expenditures have been. Give them the tools they need to create their budgets.

Setting a Timeline

Encourage managers to create their budgets within two weeks. If you give them a longer time frame, they will probably still create it in those last two weeks anyway. Longer time frames will likely feel like the process is dragging on and on, and there will be less enthusiasm and momentum. Pick a time of year when there is less going on in your organization. And, make yourself accessible during those two weeks.

Push the Numbers Up in the Budget Kit

Let managers push numbers up at this point in the process. If you have a strategic plan, it serves as an outline of where your organization wants to be. Let managers "push" to you because they know their departments best. Let it be an interactive process. Get a dialogue going with them so that they will own their numbers. This will make them truly define numbers they are going to be able to manage throughout the year.

Limiting Drafts

You should be able to keep revisions to a minimum because you've gotten managers, executives, and the finance committee involved from the start. Implementing the above recommendations will limit modifications as well. Your first draft should require only minor changes, resulting in no more than possibly three drafts. Anything more than three drafts tends to be inefficient, causing more work for all involved. More than three drafts probably indicates some steps were omitted in creating your budget.

Presenting to the Board

Now, you most likely have to present your budget to the board for approval. If you haven't already made a presentation to the board regarding your budget, try to get on their schedule.

The presentation shouldn't just be you standing in front of the board telling them what the budget looks like. Make it interactive. The people who are going to be the most excited about their initiatives are the department managers because you've gotten them involved in the process. Let them present to the board, as well. The board will enjoy seeing the managers' enthusiasm, and the managers will enjoy interacting with the board.

Don't focus as much on the dollar aspects of the budget. Focus on the ministry. Stress what kind of ministry is going to take place because of this budget. Emphasize where growth is going to happen. Show the excitement that is in the organization for these initiatives.

Don't File it Away

Phew, you're done with your budget! Everyone including the board has signed off on it. So now where is it? Is it neatly filed away in a drawer somewhere? If so, you probably won't look at it again until next year. Then you will open the file and hope against hope that you've met your goals. This leaves everyone off the accountability hook and is not good stewardship.

You need to review your budget, preferably on a monthly basis. Develop a financial scorecard that can be used to communicate to managers, executives, and the board. Tell them how the organization is doing in keeping to the budget, even if it is only through a periodic executive summary. You'll have a far better chance of staying on track if you assess your budget throughout the year.

Adapted from a workshop held at the 2006 Christian Management Association's Annual Leadership and Management Conference held in Denver, Colorado. This session was presented by Beth Flambures, Vice President of Finance, MOPS International.