Financial Health: 10 Characteristics of Healthy Budgets

Posted by Matthew Thomas

matthew-thomas-2As the year draws to a close, many enterprises have finalized their budgets for the next calendar year. In our work, we see a lot of different types of budgeting styles and processes. Organizations that are serious about their financial health create sound budgets. We find that sound budgets tend to have the following characteristics:

1. They are based in reasonably-expected revenues generated from the actual revenues of the past 3-5 years;

2. They have reasonable margin of revenue over expenses to handle any variations in either that may come their way;

3. They have reasonable provision for reserves that help them manage long-term goals, maintenance and opportunity; (My colleague David Van Winkle's Ministry Financing Group, a Preferred provider through Design Group International, has a great tool for measuring whether an organization or individual has adequate reserves to meet its goals.)

4. They have a good sense of the overall volatility and seasonality of their revenues and expenses and plan cash flow accordingly

5. They have a basic contingency plan for what will happen if the actual revenues and expenses diverge significantly from the plan, either up or down;

Ten_Characteristics_of_Sound_Budgets6. They account for as much of the part of the enterprise's economy for which the organization is responsible and as much of that economy as can be reasonably measured and acertained; 

7. They priortize financially the enterprise's stated priorities and goals and can present proposed financial activities narratively in light of theose priorities and goals;

8. They are fully articulated from the broadest, simplest versions presented at the highest levels down to the specific accounting line items representing specific transactions - in other words, even though different people or groups see different levels of detail (or even different amounts of the whole picture), everything connects between the most general and the most specific all the way through the system;

9. They lean in to the future rather than merely repeating the past; 

10. They have room for review and adjustment at regular intervals to maintain a reasonable plan period - in other words, if the budget is for a 12-month period, then, for instance, that budget can be revised and adjusted on a quarterly basis so that there is always a plan for 9 - 12 months out ahead. 

These are just 10 of the possible characteristics of healthy budgets. What would you add?



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Topics: budget, Margin, Financial Planning, confusing income with the budget, Financial Health

Organizational Transformation: Survival and Margin

Posted by Matthew Thomas

One of the most obvious symptoms of an organization in survival mode – or nearing survival mode – is a lack of margin for new ideas, programs, products or other innovation. A startup has little margin for new things beyond what it is doing – because everything is new. An established organization, however, with little or no resources allocated to new things – innovation, research, development, continuing education, outreach, and so on – is in trouble. When an organization gets to that point, it is entirely dependent on its established products, services and practices, with no room to adapt to changing conditions internally or externally.

Survival KitMargin is essential to give organizations poise and an assertive stance. Margin allows organizations to respond to changes internally and externally with a level of forethought, forecasting, or at least a level of freedom to think things through before developing an approach to a set of issues. The need for margin exists throughout all sectors of the economy – whether businesses and enterprises, non-profits, charities and churches, or government entities. If there is no margin, any minor changes to the system can send ripples throughout the whole organization.

Financial margin comes about when organizations budget revenue greater than expenses. This allows for money to be available for unexpected opportunities or crises. In addition, over time, this builds reserves so that the organization can initiate more significant undertakings that would otherwise be impossible in one budget cycle.

Organizational margin comes about when organizations prioritize all of those innovative practices we listed above: research, development, continuing education, outreach, training, and even vacation time for staff. This means scheduling time in for people to decompress and do something new, cross-disciplinary or discover something they hadn’t known before. It even gives room for people to practice something that they aren’t as good at as they need to be, in a lower pressure environment – which aids in learning.  As organizations staff their programs, services and products, this will require creating space for this kind of innovation in job descriptions, budgets, compensation, workspace and meetings.

Restoring margin will help move a survival-mode organization to a greater level of health and may help it to thrive again.

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Topics: Organizational Transformation, Matthew Thomas, Design Group International, Margin