On Budgeting

I've been wanting to write about budgeting since I started the blog, but wanted to think about it for awhile first....

So here goes.

Coming up with how much you want to spend is the easy part.  The most challenging part of creating a budget is to figure where the money is going to come from.  I'm a big fan of only putting in income you have a reasonable sense of getting.  For instance, if you have been funded by Target for the last three years at $20k, it's pretty safe to put $20k in that line.

Another trick is to find trends in the organization.  Last year I made the mistake with our outreach, which is cyclical, of putting in the previous years' income.  Not only was last year a downer for outreach, but cyclically, I should have budgeted less anyway.  It tends to dip every couple of years (as groups will have us one year, then take a break before asking back again).  If I had looked back at the trends of previous years, I would have known that.

I also believe that it's important not to set unrealistic 'stretch' goals.  This is usually done in the Ticket Sales line and in the Individual Donor line.  It's great to dream that you are going to increase your donations by $50,000, but it's not a good idea to budget to spend all of that money before it's raised.

Anthony Andler (owner of Heimie's Haberdashery) was briefly on the board of Starting Gate Productions.  One thing he said that I will never forget: "I always let my business tell me when its time to grow, not the other way around."  This stuck with me.

There are some bonuses to this philosophy.  First, it's always a great feeling to do better than budget (and it's a downer to fail to reach out-of-reach stretch goals).  When you do better than budget, it sets a new precedent for the following year.  Second, if things do better than budgeted, that usually means a surplus, or the ability to take advantage of an opportunity that requires expense.  Third, if you do better than budgeted and end up with a surplus, that money will be helpful with cashflow and reserve.  Fourth, if you have a terrible year, it will hurt a lot less if you haven't already spent a lot of money you were 'hoping' would come in.

Now I need to clarify something here.  I'm not saying that you can't have a "if everything goes as we hope it does" budget.  Or that you shouldn't come up with a business plan to increase income by 40%.  Yes.  Please make plans for growing the business.  But I think it's dangerous to count on those plans until they succeed.

In the future, I'll write about cash flow.  I think this is a very important part of budgeting.  And, if done right, will help you budget more realistically by examining month by month expenses.

I'd be curious to hear if anyone else has thoughts on this or anecdotes they would like to share.