Converting the Enemy: Budgeting During Planning
I. WAR AND PEACE: AN OVERVIEW OF BUDGETS
Common definitions of "budget" often include: 1) an albatross around the Artistic Director's neck; 2) the cause of the Managing Director's chronic insomnia; 3) The enemy.
Budgets are the enemy everyone loves to hate. As managers, we constantly try to outflank, outmaneuver, and ultimately overwhelm our budgets, reducing them (and us) to a quivering heap abandoned on the battlefield of Desire vs. Reality. Even if we manage to avoid outright war, our struggles often result in a budget that is not a useful tool, but rather:
A Lasting Peace?
We have met the enemy ... and it doesn't have to be our budget. Can we overcome our "us vs. it" approach to budgeting and regard budgets as useful tools that serve a greater purpose? Can we come to think of budgets as a means to the end of making art happen? Can we consider budgets as:
Your plans for the future expressed in the language of numbers.
Every activity you undertake has a dollar value associated with it, be that value in materials, artists' time and expertise, or paying the heating bill for your office. A budget takes your planned activities and translates them into dollars.
A plan that identifies your priorities.
Where you spend your resources is where your priorities are, regardless of any rhetoric your organization may have to the contrary. A budget can help you identify where your ideals and your actual activities may be out of alignment.
A guide to measure progress over time.
The budget is a measuring stick to gauge how well you projected the future against what actually happened. By comparing the budget to your actual financial activity you will know if you are on track or losing sight of what you intended to accomplish during the year.
Deviating from your projections is not a bad thing in and of itself. In fact, a variance can have a positive effect if it helps you take advantage of previously unknown or /unavailable opportunities. However, it is's helpful to know you are deviating from your plans so that changes can happen in a deliberate and thoughtful way.
So how do we create this "budget as tool"? How do we develop a budget that reflects your true priorities and goals, a budgets that is useful and used?
Merely adding 5% to all the costs you incurred the previous year and increasing "Income from Foundations" to plug the gap between income and expense does not make for a very useful tool. Good budgets are based on estimates that have some (the more the better) basis in reality.
How do we create a budget that is reality-based? We do research. This is initially more time consuming than adding 5% to every expense, but it pays off. At some point you are going to have to figure out all this information anyway: doing the work now will save you time later in the year.
1) What activities do you have planned for the next year? Obviously, this means you will have to have some idea of what your actual activities will be. That is, you will have to have made a plan.
2) Now the more tricky part (maybe): How much will each activity cost? This step will be a combination of research and best guesses. For example, we are bringing two artists from Russia to participate in our work next year. So, we call the airline to find out how much plane tickets will be. Accommodations: hotel or private home? Expenses while they are here? Expenses related to securing their visas? And do we have any ideas about how we might pay for all this? A corporate sponsor? An interested individual?
Building Budget Assumptions
As you start to gather information and turn it into budget numbers, this information will be the basis of your budget "assumptions": the underlying explanation of the numbers that appear in your budget. For this reason it is CRITICAL that you keep track of the information, preferably in a way that is easily tied to your budget numbers (download sample #1: PC | MAC). You should have assumptions for both income and expenses.
In constructing budgets, the tendency is to build up the expense assumptions first. What can happen with this approach, however, is that you may develop undue affection for those expenses and try to construct income projections that will "fit" your expenses. Thus, the income assumptions are built to generate enough income to cover projected expenses, rather than to reflect what is realistically possible. You can avoid this trap by starting with the income assumptions. This will help establish a realistic "scope" for your thinking about what activities are realistically feasible in the coming years.
Tip: With spreadsheet software you can link your budget sheet to your budget assumptions sheets, so that every time you change your assumptions, the corresponding budget number will automatically be recalculated. This is particularly useful when you are making budget revisions.
Interconnectedness of All Things Budgetary
You build your assumptions, you outline your priorities, you write it all down, you add it all up -- and the budget doesn't balance. Now what?
This is where the "give and take" of budgeting begins. "Give and take" does not mean add more unidentified foundation income to make the budget balance. "Give and take" does mean:
Throughout all this self-examination, the aim is to emerge with a plan that is doable, that reflects the priorities and goals of the organization, and that translates into a balanced budget.
1) Who is going to do all this work?
Depending on the size and structure of the organization, it could be one person (the Executive Director, the Business Manager, the Finance Manager) or it could include several people. If your organization functions in departments or areas of activity, it may make the best sense to have the people responsible for each area of activity gather the initial budget information. This information is then integrated into a comprehensive budget by one person (preferably one person who is very comfortable with manipulating numbers).
Tip: If more than two people are providing information for the budget, make sure they are gathering it in the same format so it can be easily integrated. The easiest way to do this is to give them a worksheet to use (download sample #2: PC | MAC) that ties into your budget format.
The budget format should correspond to your income statement format for ease of comparison. Following your chart of accounts for budget categories is usually the best way to make this happen (if the chart of accounts does not have the "right" categories, then you may need to revamp your chart of accounts). (download Sample #3: PC | MAC)
For the plan, include at least two years of actuals. This enables readers of your plan to compare the reasonableness of your projections to your historic activity. (download sample #4: PC | MAC).
3) Multiple Drafts
Don't kid yourself: you'll have multiple drafts of the budget before you're through. For this reason, and for general sanity, put a date on every single piece of paper that has numbers on it. This will help you identify which of the morass of papers around your desk is truly the most recent version of the budget.
Tip: Your spreadsheet software can create a footer that will always print the current date on the bottom of the page. If you're doing a marathon session of multiple drafts and generating more than one draft per day, you may want to include the time on the footer as well.
Certain information in your budget may be confidential (salary levels, for example), so you may want to create a format that can consolidate or hide confidential information (download sample #5: PC | MAC).
III. GETTING ON WITH BUSINESS: USING THE BUDGET
The more flexible the format of your budget, the more it will be used, and the less often you will have to recreate the document in different formats. Think about how (and who) you may want to use it:
-- Staff members within the organization
-- Board Members
Updating/Revising the Current Year Budget
As a rule, don't do this. Some people revise budgets every month. This is not very useful. Staying with your original budget through the year gives you a stable point for measuring progress (as opposed to the moving target in budgets that are revised monthly). It also gives you a way to measure your budgeting skills (i.e., your ability to accurately/realistically project into the future). Variances will occur, of course, but it is better to note those variances in the budget-to-actual report with explanatory notes (download sample #6: PC | MAC).
It may be appropriate to revise the budget if the circumstances of the organization change so drastically that the original budget is completely irrelevant. In this situation, you will want to repeat the budgeting process and create a budget that reflects the new circumstances. You would also want to be sure that this new budget is reviewed and approved by the Board as a replacement for the original budget.
Updating/Revising Multiple Year Budgets
Ideally, you will revisit your plan and accompanying budgets every year and update them for the coming year. If you're really ambitious, each year you will also add a year to your planwith a corresponding budget. Having the format and well-documented assumptions in place already will make this task much easier.
An End to the Conflict
While you may never think of a budget as your best friend, it is possible to forge a new relationship with your former enemy. You may even come to regard your budget as:
1) Helpful tool;
2) Measuring stick;
3) Respected colleague.
And the reward for working on this relationship? The reward for taking the time to construct a budget based in reality, to use the budget, to keep it current? For starters, you may have fewer crises to manage. You may have fewer sleepless nights. You may even have fewer ulcers. Most important, however, you may find that without the constant strain of fighting against your budget you have more time and more energy for what is, after all, the most significant thing you do: making art happen.
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