5 Steps to Budgeting During Uncertain Times: The Complete Guide
As we begin 2021, we are simultaneously reeling from 2020 and breathing out a sigh of relief that it is over, while trying to cobble together a plan for the future during a time filled with uncertainty. We are all building the plane, while flying it, through the fog.
I am not a scientist or an economist, so I will just say this: we know that 2021 will bring some level of uncertainty and unpredictability. Probably not as much as 2020, but MUCH more than a “normal” year.
When we are faced with making big decisions and planning for the future amidst this level of prolonged uncertainty, it is difficult to know where to even begin.
Most organizations have already gone through a huge financial transition since March 2020. Budgets have been scrapped. Staff has been shuffled and probably reduced. Programs have shifted online, paused, disappeared. Yet we must still come up with a plan for 2021 and beyond.
The 5 step cycle outlined in this article is designed to be incorporated into your existing budget practices, so that it can be used by any organization at any stage of their budget and planning process.
However your organization is already responding to this period of uncertainty, following these steps will help you to set up a systematic and organized way to manage uncertainty in your budget, preparing you to make quick decisions and respond to sudden changes in the external environment over the course of the coming year and beyond.
Step 1: Understand your current financial position
Start with cash flow
Simply put, you need to understand how much money you have, how much money you expect to receive (from donors, funders, etc.), and how much money you expect to owe (to vendors, creditors, employees, etc.).
For many organizations, the top priority is, of course: Can you cover payroll? With a close second being: Can you cover your existing monthly expenses? Whether the answer to these questions is yes or no will inform the next step of the process.
If the answer is yes, great. Figure out how long it will last by projecting out 6 months, 12 months, 18 months.
If the answer is no, then you know immediately that you will need to make some difficult decisions. This may seem obvious, but many of us tend to skip this step - we know things are bad, we don’t think we need to know exactly how bad...but we actually do.
Close the books on 2020
If your fiscal year ends on December 31, you (or your accounting firm) are already well underway working on the 2020 year-end close. Even if your fiscal year ends at a different time during the year, it is still a good practice to formally close the books on 2020, the first step in putting an incredibly unusual year behind us.
Hopefully by now you have calculated the results of your 2020 year-end fundraising efforts and have an understanding of how things went. Now is the time to update your fundraising plan for 2021 and address any concerns and potential impact on your expense budget.
Get a clear picture of your assets and liabilities by accruing outstanding revenue and expense payments.
Evaluate your resources
Assess what you can and cannot do based on your current resources.
Did you have to lay off staff? How have your financial resources been impacted? What about your physical property? What constraints are your programs under as a result of the pandemic?
It may help to think about each type of resource separately:
Human resources (employees)
Financial resources (cash, lines of credit)
Physical resources (buildings, land, equipment)
Intellectual resources (brand, copyrights/patents, programs)
Set a new baseline for revenue & expense projections
Every time you complete this step, you will come away with new information that will inform your revenue and expense projections for the next round. How much it varies will depend greatly on your organization’s individual situation.
Sometimes, you will just have a few edits to tack on to your original budget. In other cases, your entire business model may be uprooted, either temporarily or permanently, and you may need to start from scratch and go through the exercise of building a new budget from the ground up.
Either way, use this information to establish a new baseline for the next phase of your planning & budgeting.
Step 2: Reassess your priorities.
Now that you have a clear and accurate snapshot of where your company stands financially, it’s time to prioritize.
Evaluate changes implemented in 2020
Chances are you have already made some significant changes at your organization to account for stay at home orders, social distancing, and other health and safety requirements.
Now is the time to evaluate how the changes that you made in response to the pandemic impacted your organization in terms of both financial and mission-based goals. What worked? What didn’t?
Refocus around your mission and top priorities
Whenever you have an exceptionally difficult problem to solve, go back to your mission and vision to help guide your decision making.
Do you have the resources (human, financial, physical, and intellectual) in place to meet your highest priority needs? If not, you have more decisions to make.
If you had to downsize staff in 2020, how is your new structure working? Do you have the team in place to achieve your highest priority goals?
If you adjusted your programs, how is your audience/community reacting?
What can you stop doing?
Answering this question is a challenge all nonprofits face - we all want to do more and make a greater impact. Sometimes difficult decisions must be made to end really, really good programs so that the greatest ones can continue.
Again, go back to your mission to guide your decisions.
Improve as you rebuild post-pandemic
Even at the most well-run companies, there is always room for improvement. As you rebuild your organization, avoid going straight back to “business as usual.”
Implement real efforts to address critical issues like racial justice, gender equality, and climate change into the way that your organization operates.
Find more efficient ways of doing what you do. Huge money-saving changes that once seemed drastic, like shifting to primarily remote work or eliminating expensive office phone systems, are now the norm. Take advantage of technology to build a more agile organization and better serve your community.
Change your metrics
Most, if not all nonprofits track metrics of some sort to measure progress toward goals: # of people served, # of animals rescued, # of acres preserved, etc. No matter what your organization does, your priorities have shifted, your goals have shifted, and as a result your metrics should also have shifted. Revisit the metrics you are focused on for 2021, based on the external environment as well as the new priorities you identified in Step 2.
Simplify your metrics as much as possible. Spending excess amounts of staff time tracking & updating goals that are constantly changing is a not a good use of limited staff capacity and financial resources.
Step 3: Streamline your budget process.
Depending on what your existing budget process looks like, and how many changes you need to implement based on the outcome of the first two steps, this could be an easy tweak, a complete overhaul, or anything in between.
Expand your budget team
Your budget will be more accurate if you expand the process to gather input from people who are working directly on the ground in the day-to-day mission-based activities, outside of finance, development, and management.
Avoid playing the telephone game and wasting time in unnecessary communication loops - create a team to work directly on the budget, including people from as many areas of the organization as possible. Keep things simple and make responsibilities clear in advance, to prevent the challenges that we all know can arise when there are too many cooks in the kitchen.
Conduct more frequent reforecasts
The exact timing that works best will vary depending on your company, but I recommend increasing the frequency of your budget updates, no matter what your current schedule is.
Track and update projections for key drivers daily or weekly. Key drivers are the activities that are critical to your organization and could include financial information like donations, event revenue, expenses in specific categories, and operational data like attendance or other metrics. Keeping track of the most important data frequently will allow you to spot any problems quickly and act fast.
Conduct more in-depth reforecasts of revenue and expenses monthly or quarterly. This will again depend on your organization, but analyzing and updating your revenue and expense projections more often than usual will help your organization be more informed and ready to make decisions as external conditions change.
Plan for flexibility and uncertainty
Budgets and operating plans should be expected to be more flexible than usual to account for the uncertainty and unpredictability that 2021 brings with it.
Understand that things will change. The key is to put parameters into place so that you can operate within a framework and have a clear path forward at each checkpoint along the way.
Implement contingency plans triggered by certain thresholds or events - i.e. if contributed income does not reach a certain level by a certain date, a predetermined series of cost-cutting measures is kicked off.
Adjust performance goals to facilitate a test environment in which new initiatives can be piloted with “room to fail.” For example, if a new virtual fundraiser does not meet its revenue goal, it does not necessarily mean that it was a “failure.” Qualitative data like audience/donor reaction and engagement can sometimes tell us more than quantitative financial data.
Step 4: Plan for multiple scenarios.
Scenario planning allows you to plan and budget for multiple possibilities, so that you are always prepared to make decisions quickly, and to adapt as external conditions change.
Focus on 2-3 scenarios
Usually scenario planning focuses on best case, worst case, and some variation of ‘in between’- either most likely or moderate (between worst case and best case).
In practice it often makes sense to use more specific scenarios, but focusing on best case, worst case, and in between can often kickstart the decision-making process to arrive at the “right” scenario.
Incorporate scenario planning into your overall budget process
You can apply scenario planning to your entire budget, or use it to compare detailed scenarios for certain areas (i.e. salaries, contributed income) that require more complex analysis.
After evaluating multiple scenarios, choose one (or cobble together aspects from multiple) to build out the detailed organizational budget, on the monthly or quarterly schedule you have already established.
Update frequently with new information
Go back to your scenarios regularly and update them as assumptions change, so that you have that information readily available to incorporate into your overall budget during the next cycle.
Step 5: Evaluate and refine.
Now that you have taken stock of your financial position, reassessed your priorities, adjusted your budget process, and compared multiple scenarios, it’s time to test out your new plan and put it into action.
Follow your plan for a month or a quarter, based on the timeline you’ve set up for your organization.
Monitor key drivers and triggers/thresholds
As you put your plan into action, don’t forget to pay attention to key drivers and the triggers and thresholds you set up in Step 3, so that you can respond immediately to any surprises and implement changes to your plan as quickly as possible.
Evaluate at the end of the test period
At the end of the test period, conduct an evaluation to inform the next budget cycle. What is working? What is not? What has changed since the last budget update?
Use what you learn to inform the next cycle
Take what you learn during the evaluation process and use it to refine your decision making for the next cycle.
These 5 steps build upon each other and are designed to be repeated regularly and adopted into your existing budget cycle, so make sure to adjust the next cycle based on what you have learned.
Technically, there is also a step 6 embedded in this cycle: REPEAT.
As soon as you have finished Step 5, you can start right back at Step 1 again by digging back into assessing your financial position for the current month or quarter, and analyzing the results of the previous period’s budget and operating plan.
Each time you go through the cycle, you should come out having gained a greater level of clarity into your financial position and your most up-to-date priorities, streamlined your budget process, evaluated multiple budget possibilities and chosen the best option, and taken a step back to evaluate what transpired.
This process is designed to take away as much uncertainty as possible by going through every aspect of your budget step by step, according to your own schedule, taking it one decision at a time so that it is always manageable.
As 2021 progresses, we will be inching toward what will soon be the new “normal” in a post-pandemic world. Utilizing the 5 steps outlined here will help your organization to manage the impacts on your budget as changes arise, and look forward into 2022 with clarity and a plan.