The benefits of ‘budgeting for results’
Beginning with detailed, specific outcomes when building the budget can help not-for-profits attract impact-driven donors
By Ken Tysiac
Donors' embrace of the information age has had significant effects on not-for-profit organizations. When requesting support and when reporting on the results of contributions, not-for-profits are finding that a method known as "budgeting for results" can be helpful as they tell their stories to donors and others who want to know more about how funding helps a not-for-profit accomplish its mission. However, budgeting for results is not without challenges.
Donors' desire for more information comes at a time when not-for-profitfinance teams are facing many pressing donor issues, which include:
The aging of the Baby Boom generation.
The shift in donor behavior as Millennials become more prominent in recruiting efforts.
New methods of soliciting and receiving donations — and communicating with donors — resulting from new technology.
Potential fallout from new tax legislation that may decrease the number of donors who receive tax breaks for their donations.
As more than 1.5 million not-for-profits compete for resources in this environment, leaders in the sector are finding that focusing on measurable results provides a way forward for their organizations.
"It's really about how effective you are and what really constitutes success as an organization," said Mark Oster, national managing partner for the Not-for-Profit and Higher Education practices at Grant Thornton LLP. "I'm seeing an evolution in terms of best practices at the organizational level to respond to some of these issues around transparency, trust, and accountability."
Although donors still may check Charity Navigator and other sites that rate not-for-profits' effectiveness, they often are looking for more information than those sites can give them. Donors are turning to the not-for-profits themselves for this information as they seek to support a mission that truly matches their passion. They want to see concrete numbers to ensure that the not-for-profit is following through.
For someone who cares deeply about having underprivileged children learn to read, for example, it's no longer enough for a not-for-profit to have 90% of its donations go toward books that are distributed to these children. The donor wants to understand how many children the organization is serving and to see how the literacy rate among those children is rising as a result of the not-for-profit's activity and the donor's contributions.
This is a more sophisticated arena for donors and not-for-profits, and it creates new opportunities for organizations. First, it gives not-for-profits an opportunity to refine their activities and tell their stories through financial reporting and other means in a way that differentiates them from their competitors. Second, it creates the need for a new approach to budgeting that will allow not-for-profits to produce a measurable impact. This process of budgeting for results requires a new, systematic look at an organization's mission, the metrics that are collected, and the operations that drive the not-for-profit toward those metrics.
"You actually start with the desired result you're trying to get from the work that you're doing," said Carolyn Mollen, CPA, the CFO of not-for-profit leadership network Independent Sector in Washington, D.C. "Then you layer back into that so that when you're trying to evaluate what you're going to invest in and where you're going to use your resources, you're asking the question, 'Is this the best use of these resources to achieve the result that we're aiming for?' "
This idea of budgeting for results is likely to become more important as the influence of Millennial philanthropists increases. Millennials are most likely to donate when they feel inspired by an organization (69%) and when they have specific examples of how their gifts will impact the organization's work (49%), according to a 2013 survey by The Millennial Impact Project. To meet this demand, it's important for not-for-profits to start the budgeting-for-results process with a laser-focused idea of the specific impact they are trying to achieve — and how to measure those results.
THE END IS THE BEGINNING
Budgeting for results starts with careful consideration of what an organization is trying to accomplish. The process works best if the not-for-profit leaders develop a clear idea of the outcome — rather than the output — they are trying to achieve. The outcome is the ultimate result metric. Consider the following examples:
Administering 5,000 flu shots to a county's at-risk seniors is an output. Decreasing the number of seniors in the county who are hospitalized with the flu over the winter from 200 to 50 is an outcome.
Distributing 10,000 direct-mail pieces advertising your church is an output. Increasing membership of your congregation by 200 is an outcome.
Providing 100 at-risk young adults with dress clothes for job interviews and eight hours of training on résumé writing and interview techniques is an output. Having 67 of them get jobs within three months that provide a career track and a salary of at least $30,000 a year is an outcome.
Determining a desired outcome, Mollen said, starts with the not-for-profit considering its mission and having a concrete idea about what type of well-being the organization is trying to create for that population.
"Essentially you're starting with the big picture and then tiering back down until you get to the granular funding of the expenses," she said.
Stan Reiff, CPA, CGMA, partner and professional practice leader for consulting at CapinCrouse LLP in Atlanta, uses the example of an organization that assists in matching children with foster parents to show the benefits of outcome-drivenbudgeting. He said it's much easier to find foster parents for infants and toddlers than for teenagers who have experienced a lot of trauma and dysfunction in their lives. The organization's goal may be to reach a higher target number for teenagers placed in foster care.
"That's where you say, 'What's the outcome we're trying to [achieve]? What's the budget requirement for it? What are the differentials? How do you justify those?' " Reiff said.
The mechanism for raising the number of teenagers taken in by foster parents may be enlisting the services of a clinical psychologist who can match the teens' behavioral care plans with foster parents who are capable of and willing to provide that sort of care. The organization may have data showing that foster parents will be more likely to welcome teens if they understand how their particular skills might help those teens. This drives the budgeting decision to pay the clinical psychologist. In seeking donors to provide those funds, the organization can describe in specific ways how society will benefit if more teens find foster homes. Tying the funding request to those specific outcomes gives donors an idea of exactly what they will be paying for.
"Many times the government funding is unable to solve it either from a funding or service platform, and that's where the not-for-profit community does a much better and more efficient job," Reiff said. "That comes back to outcome-based budgeting. What do we need? How much is it going to cost? How do we budget for not just the activity, which is providing foster care, but we need to do it this way and here's why.
"From a management perspective, you have to measure activities, but you should be budgeting on the results and the outcome, not the activities. Activities do have a cost, but the measurement, results, and ratios really need to be driven by the outcomes."
TYING DATA TO THE OUTCOME
The most challenging part of budgeting for results is figuring out how to provide the appropriate resources to achieve the result once a desired outcome is decided with certainty and clearly articulated. This is where predictive data analytics help an organization reach its goal, and where talented CPAs who understand which levers to pull can truly make a difference. Using historical data, an organization can begin to understand which activities are likely to result in the desired outcome, and can structure the budget to fund those activities.
In a simplified, fictional example, consider a not-for-profit that is designed to help at-risk 17- to 21-year-olds who have been under court guardianship make a transition to a positive, productive lifestyle as young adults. The desired outcome is to help 80% of the young people the organization works with enroll in a two-year or four-year college and/or get a career-track full-time job. One step that's essential in building toward that outcome is graduating from high school or earning a GED. The organization provides tutoring and counseling to young people, and historical data show that if all of them receive 100 hours of this kind of help per year, 95% will get their high school diploma or equivalency within two years. Further, the data show that if 95% get their high school diploma or equivalency, 82% will enroll in a two-year or four-year college.
In this case, the budget can be built to fund 100 hours of tutoring and counseling per student. Furthermore, imagine the data show that 87% of the young people reach the goal of college enrollment or full-time employment if they receive at least $500 per month toward their rent. These funds, too, can be added to the budget, which takes shape based on a strategic plan created to fund the activities that have been shown to drive the outcome.
"It's not just putting money into the budget," Reiff said. "We tie it to the outcome, and we communicate that to the donor. It becomes far more compelling."
The funds necessary to achieve the outcome are just part of the budgetary equation, however. This form of budgeting also needs to fund the infrastructure that makes the operation possible. The not-for-profit needs an office, staff to run the programs, IT help to protect its systems and data, staff development funding to help employees develop skills and stay engaged, and funds necessary for recruiting and maintaining a competent board of directors.
"If organizations are underinvesting in their human capital, technology, and infrastructure, they're always playing catch-up, and they're not using the dollars you're investing as wisely," Mollen said.
ADVANTAGE IN COMMUNICATIONS
At a time when donors are eager to understand the exact impact of their contributions, this form of budgeting can be a huge advantage for a not-for-profit. A charity can present a compelling argument if it can explain with confidence that if it reaches its goal for tutoring funding, 80% of its clients are expected to gain full-time employment or college enrollment. These conclusions can be presented to the board, employees, and clients as well as donors, building momentum toward funding goals.
Reiff said everyone in the organization needs to understand the not-for-profit's desired outcome and his or her role in contributing to it, with measurable targets for all employees. This enables responsibilities and accountability to be established, and management can monitor dashboards that show when targets aren't being met. At that point, corrective action can be taken before the organization fails to deliver the desired outcome.
"Once everyone in the organization truly knows what their measurement is toward the output, it becomes contagious, innovative, participatory, and very collegial," Reiff said. "Then it's easy to communicate that to the board because everybody's got their dashboards that roll up. And then the board is actually trained to explain what the outcome is for the organization so they become better ambassadors."
Although the benefits to the organization can be substantial, budgeting for results isn't always easy. For starters, it can't be accomplished by the finance team alone. It requires input from all departments on how their work connects to the outcome and the not-for-profit's mission. An integrated budgeting process is deeply collaborative and requires all areas of the organization to communicate their needs to finance.
It's sometimes difficult for organizations to find the perfect measure to aspire to as well as good data to evaluate progress. A review of mission can help with finding the proper measures, along with determining how the measures are obtained and who the partners will be in helping to obtain the measures.
In an increasingly data-driven world, where donors are eager to measure their impact, making the effort to implement this type of budgeting can help not-for-profits drive organizational efficiency and enthusiasm. Budgeting this way also can give donors the information they need.
"There certainly is a push, particularly among new philanthropy, to make sure they're really funding impact," Mollen said. "... At the core, it comes down to being able to articulate the connection to the impact that those dollars are going to have."