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The top 5 budgeting problems facing nonprofit CFOs

Aug 24, 2020

Nonprofit CFOs must balance budgets that were made obsolete by COVID-19 – and that’s not their only challenge.

Wipfli CPAs walked through the top five budgeting problems for nonprofit CFOs during a virtual Wipfli National Training Conference session on August 18. Rebecca Hurst and Ciara Leahy, both CPAs and Wipfli associates, offered insights and best practices to help CFOs overcome these common financial planning hurdles:

1. Financial forecasting inefficiencies and credibility

Leahy said constant change has made it nearly impossible for CFOs to create accurate financial budgets or to get information to decision makers in a timeframe and format they can use, especially if they rely on manual tools and processes.

The fix? COVID-19 has  pushed many organizations  toward one best practice solution: scenario-based budgeting. Scenario-based budgeting involves a planning process that evaluates different outcomes and develops an action plan for management to follow. The team starts with the business plan and layers in major assumptions, risks and outcomes to predict how different variables will affect the financials. As part of this process, it is important to ensure that everyone is part of the solution and understands how to adjust to changing environments.

This approach works  best when it is supported by technology; the team should create its playbook from an easy to follow and  accessible financial record. Templates can speed up the process, and defined workflows can prevent data duplication and error.

2. Organizational misalignment

Organizational misalignment is often more difficult to tackle since it starts at the highest levels within the organization and can involve all areas of the company. Whether planning cycles are centralized or decentralized, CFOs battle to maintain control over the financial plan and its supporting data. People, processes and technology have to align to create a single, reliable source of truth.

Leahy said overcoming organizational misalignment starts with making sure our budgets/forecasts are aligned with our organizations strategic plan. It is also essential to build a comprehensive A to Z process for budgeting – what it means, who’s responsible, and how it flows – and make sure everyone is on the same page.

“Budgeting can’t be nimble or structured if the process only resides in one person’s head,” Leahy said. “All leaders in the organization have to think about the financial impacts of their decisions and move in the same direction if you’re going to accomplish your organizational and financial goals.”

Confirm what your stakeholders need in terms of reporting, format and frequency in order to be effective contributors. “We can solve many problems through education and communication,” Leahy said. “Ask upfront what stakeholders want to see, and make sure you’re communicating effective data they need to make decisions.”

3. Operational data

Many CFOs are drafting budgets with too little information, too late in the game. Organizations that use Excel spend more time rekeying and reworking financial data than forecasting, and their reports are difficult to navigate, interpret and share. Delays or deficits in timely, reliable data make it difficult to pinpoint or adjust operations.

Solving this problem takes people and technology, Leahy said, but the goal should be a single source of truth for data reporting. “Ideally, you want one place to go that you can rely on,” she said.

Data definitions and key performance indicators (KPIs) should be agreed upon and commonly understood across the organization. Best practice is to focus on a few KPIs – three or less – and report on them frequently, in real time if possible.

Drill into different data components regarding the KPIs and investigate “what-if” scenarios to uncover issues and opportunities. Accurate and accessible data analytics should start to drive major decision making as finance staff begin to understand “why” things happened, not just “what.”

4. Cumbersome financial consolidation

Planning and closing the books across companies, various cost pools or a combination of systems is cumbersome, if not impossible with some ledger packages. Some CFOs have to consolidate financial information in Excel or through other manual processes, delaying the financial close and wasting valuable staff time.

There’s really no shortcut here (all financial combinations or consolidations require some adjustment), but a holistic approach can ease some of the pain.

The best solution is to store all of your business-driven rules in one database so you can continuously take advantage of them. Standardized templates can also increase efficiency and ensure appropriate checks and balances are in place. The faster an organization can close, the more time its leaders have to make decisions and reshape the next forecast.

5. Foreign currency translation inefficiencies

CFOs that deal with foreign currency often struggle to report and forecast financial data across local and common currencies. They need complex files and spreadsheets to track and maintain currency translation data, which may vary by account level or time period.  

To avoid delays in financial reporting and decision making, CFOs need technology. Best practice is to centralize and automate the data and to surround it with governing business rules. An ideal tool would automatically calculate and store currency types and rates by line item and time period.

Incorporating best practices for forward thinking activities

Once nonprofit CFOs understand how to tackle these challenges, they can shift their focus in the organization, Hurst said. “Rather than look backward at financial information once it’s old, CFOs can create timely forecasts and reassess the future of the organization.”

Hurst introduced rolling forecasts as one way to help nonprofits gain more agility in uncertain times.

Compared to annual financial budgeting or planning, rolling forecasts are more akin to monthly updates. They maintain a continuous planning horizon by adding new months or quarters once older ones are complete. Projections are shorter and prepared more rapidly, so organizations can react to sudden changes instead of waiting for an annual budget cycle. “You can focus on the business, not the fiscal year,” Hurst explained.

She said the number one benefit of moving to a rolling forecast is that it allows you to update your vision of the world and to continuously update your plans.

There is no “one size fits all” to budget and forecast, Hurst said, so nonprofits should look for a method – or a mixture of methods – that fits their needs. “Identifying your problems and instituting best practices is the first step in improving your budgeting process,” she said.

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