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: budgeting, budget, Margin, budgets, Financial Planning, confusing income with the budget, Financial Health,, Reserves

Financial Health in Organizations: Solvency and Reserves

Posted by Matthew Thomas

Back in June, we talked a bit about solvency. One of the best ways to maintain solvency is to have a healthy amount of reserves, and to use them judiciously.

matthew-thomas-2Clients often ask me what I consider to be a healthy amount of reserves for their organization. My typical answer is that it really varies based upon their particular enterprise’s goals and needs. Many enterprises operate without much in the way of reserves at all, and this ends up constricting and restricting their options when finances get tight. Nevertheless, long-term solvency is often dependent on having healthy levels of reserves.

In order to set a healthy reserve target, consider answering the following questions:

  1. How much money do we need to make up the difference between our lows in income and our highs in expenses?  (Basic cash flow cushion)
  2. What sorts of emergencies could put us out of business if we don’t have the funds to cover them right away?
  3. Do we foresee any major new initiatives from which we may want to draw down savings in order to start them?
  4. If we lost our major source of revenue, how long would it take to wind down our affairs and go out of business? How much would this cost?
  5. Are we dependent on any cash for investment revenue?
  6. What assets can we sell to raise cash if needed?

Adding up the amounts these six questions generate can help begin to generate a reserve target.

Do you have any additions or subtractions to this list? What has worked for you?

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Topics: Matthew Thomas, Financial Health,, Solvency,, Reserves