Why Simple Budgeting Needs Big-Picture Leadership

I write a lot about the future in this space. Not in the thought-leader-futurist sense, where people pontificate on what’s going to happen—I routinely fail to correctly predict election outcomes and election winners, so my crystal ball is forever cloudy on that sort of thing. But I do try to nudge leaders here to think about the future of their staffs and their boards, and to do the necessary work to identify the trends that will affect their associations (and their industries) in the years to come.

But sometimes the conversations about the future need to be a little more ground-level. As in: Can you keep your association’s lights on for six months if you face some kind of financial catastrophe? That’s a consistent issue for many smaller associations, and recent research suggests that the broader nonprofit world is struggling with the problem. So checking on your financial status—and taking a fresh look about how you’re planning ahead—is worth a look.

The scope of the problem is revealed in a report by BDO earlier this summer, Nonprofit Standards: A Benchmarking Survey  (opens in a new tab) [PDF], which suggests that the sector is so focused on creating and expanding programming that it’s putting its survival at risk. As a summary article in Fast Company puts it, nonprofits first “pour too much money into programs and not enough into overhead, which may help more people in the short term, but can create a ‘starvation cycle’ where eventually the group can’t support its own growth  (opens in a new tab). Second, they don’t save any money for unexpectedly lean times.”

Details from the study proper highlight the intensity of the struggle. Among all organizations surveyed, only 46 percent have six months of operating expenses on hand. A little more than 40 percent of organizations say that meeting demand for their services is a challenge, and yet many of them are responding by doubling down on spending. “When asked how program offerings might evolve to meet the needs of their constituents, nonprofits are more likely to expand their offerings than constrict services,” says the report. “Forty-seven percent of nonprofits say it is somewhat likely they will introduce new programs without eliminating others, while 15 percent consider it to be a very likely next step.”

Foggy as my crystal ball is, I recognize that expanding when you don’t have the means to do so doesn’t lead to a bright future. The BDO report suggests this happens because the nonprofits surveyed are pulled in different directions, at once “under pressure to minimize overhead and prioritize programmatic spending.” The obsession with overhead has been known to get some experts hopping mad, and there’s some good reason for that—why shouldn’t organizations get to structure themselves in ways that better ensure their ability to keep running?

The question becomes more pointed when you consider the study sending a strong hint that organizations should consider more partnerships or outright mergers. (Generally, they’re open to work with other nonprofits, but mergers are pretty much off the table.) In a more sensible world, nonprofits ought to be culturally encouraged to shore themselves up, not thin their own ranks to support a mission.

BDO’s report emphasizes the charitable organizations in the nonprofit space, which are more reliant on donations and grants than associations—and more likely to be targeted for tut-tutting scrutiny about overhead. But associations aren’t immune to reserves issues. Many associations, particularly smaller ones, don’t have dedicated finance committees that look thoughtfully at their investments and reserves, instead leaving it to the board, which may be full of industry leaders but not financial pros. And the culturally accepted standard of six months of reserves may not be enough for smaller associations.

Associations, and all nonprofits, do well when they lead on finance and establish finance committees and sensible investment policies. And some of that big-picture thinking helps here, too: One expert I spoke with a few years ago argues that financial expertise should be built into the board nominations process, and that a board president should have a stint as treasurer. “If you don’t understand where the resources are coming from and where they go, you’re not going to accomplish what you want to accomplish as president,” he told me.

Better that than scrambling for liquidity when a crisis hits. Not every nonprofit needs to exist. But before conceding that to others, it owes itself to create a culture where its near-future finances are stable, so it can take on the big, far-future stuff it exists for.

How does your association handle financial oversight, especially when it comes to reserves? Share your experiences in the comments.

(Jirapong Manustrong/Getty Images)