Thursday, August 21, 2014

Setting Your Organization's Budget On Its Head

What would you think if I told you that how much money you have – or think you will have – has nothing to do with your organization’s initial strategic planning? And in fact, you’re potentially stifling creativity by considering money first? For me, this insight began at a military headquarters, as we tried to plan the year ahead to train USAF pilots…

Flashback #1:
Back in the day, we would get allocated a set amount of money from the annual defense budget to train said pilots. Thanks to history, we had a pretty good idea of what it costs to fly a jet for one hour when you factored in things like fuel costs, maintenance needs, and the manpower required to support the fleet (for the sake of argument, let’s say that’s $500 per hour). So, when the numbers came down from above, it was relatively simple math: take X millions of dollars and divide by 500, and that was how many hours we would contract to fly for the coming year.

Ex: $100,000,000 / 500 = 200,000 flying hours

There was just one problem: we were in the business of training pilots, not flying planes.

Thanks to the efforts of some key people in the Operations and Logistics community, we joined forces and came up with a process to determine the Operational Requirement, as well as our Capability, and then convened together to see how things flushed out.  Capability limiters could either be by Operations (ex: the # of instructor pilots available) or Logistics (ex: the number of aircraft in the fleet mission ready).

This honest assessment by each group allowed us to consider the areas we were experts in - without the other’s input – so that when we came together, we had solid bases from which to negotiate. It also allowed us to plan for what we needed / were capable of doing, then being as efficient as possible and not over or under-producing.  I’m betting some of you already can see where this has application in your organization…

Operations – needs 1,000 pilots X 200 hours = 200,000 flying hours
 - using an avg of 200 hours needed to produce one pilot

Logistics – has the overcapacity to produce 243,500 annual flying hours
 - fleet has 500 aircraft that on average can fly 487 hours each annually

Outcome: Training HQ requests funding for 200,000 hours at cost of $100M (versus funding the capacity = $121M)

Flashback #2:
It’s strategic planning time for the year ahead for a small nonprofit. Based on historical data, it’s first determined that Development can get grants / fundraise $1M for the annual plan. Since it’s a thrifty organization, overhead costs are set at 15% - $150K - so the Programmatic budget is $850K, and they are challenged with planning that scenario to spend that budget. Sound familiar?


Using the military example above, here’s what I would suggest trying instead – and it costs you nothing to do it. Recall that during strategic planning, the sky is (initially) the literal limit, so it’s time to dream big and then tailor things down as capacity limiters kick in.

So instead of first saying, “We have X amount of programmatic dollars to serve our community,” start instead by asking the question, “What do we want to accomplish?”

Let’s use the example of a charity that does equestrian therapy to help people with mental health issues. Their mission is visionary and straightforward: by combining traditional counseling with the caring, feeding, and exercising of a stable of horses, they are able to dramatically improve the quality of life for those they serve. Up until now, they used the traditional budget process outlined in Flashback #2.

Instead, the Programmatic team gets together in October to consider the next year and asks themselves, “What do we want to accomplish?” (Requirement) AND the Development team is also meeting separately asking the same question, in terms of fundraising (Capability).

For the sake of argument, let’s say they served 350 people last year but after doing a local survey, they feel they need to increase 20% to 420. This is a rational, thought-out goal not encumbered (yet / maybe) by any limitations.  Meanwhile, Development has determined they can raise $650K in the coming year. Now it’s time to start doing some math, in terms of cost:

Program Cost for 420 Clients: $420,000
Two additional horses: $25,000
Additional stables / care: $30,000
Admin costs: $125,000
Total Budget Cost: $600,000

Without limiting their creativity on either end, they can go into the coming year with a sense of confidence that their plan is measurable and attainable, with hopefully some money left in the bank at year’s end. But what if Development had come up with a lesser number of funds raised, or Programs had a much higher client number to serve?  Well, then it’s time to constructively negotiate.

Since everyone has been honest coming to the table, it’s possible to now look at the models used to determine the Requirement and Capability, and see if things might be tweaked to increase Capability. Or if there really are limiting factors that cannot be overcome right now, reduce the Requirement.  Regardless, the organization will still be secure in their plan and budget, no matter what the outcome.

I realize that there are some organizations where budget availability is rightly the first player, for example, in the annual gift of a family foundation. But I would argue the majority of organizations could benefit from this Requirement versus Capability style of thinking. As I noted, it costs you nothing initially, and at the end of the day you’ll be thinking as creatively as possible and able to explain where you are going, and most importantly, how.

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