Budgeting for 2023: Risks and opportunities

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“Budgeting isn’t about limiting yourself – it’s about making the things that excite you possible.” – Unknown

Organizations with December year-ends are moving into that magical time of year.  No, I’m not talking about pumpkin spice season or even the winter holidays. It’s budget season! This year’s budget process carries more opportunity to add value for your organization, as well as elevated risk associated with not adequately realizing that value.

How does the development of a budget add value? The budget should tell the story of what the organization’s goals are for 2023 and how you, as the organization’s leaders, plan to get the organization to those goals. Don’t limit yourself to a budget process that’s just about numbers; incorporate the numbers into the broader narrative of what your organization is going to accomplish in 2023.

Of course, you need a budget that shows the planned and expected financial performance for next year. But the conversation of how those numbers come together — and the story they tell of your plans for 2023 — is where the value lies.

Deriving value from the budget process requires focused attention (read: time from your staff). This is a challenge due to the ongoing effect of staffing shortages in the areas of your organization responsible for budget inputs. Many organizations feel the accumulated effect of being under-resourced in both administrative and operational positions. Elevating the budget process to an item of value rather than just another task to check off of your people’s to-do lists requires focused attention that may be in short supply. Be cognizant of this, call it out, and work to address it.

To get a sense of whether your organization derives value from your budgeting process, think about these three things as you prepare, review and consider approving your organization’s budget:

1. Environmental and economic conditions

The environment in which we operate has changed a lot in 2022. One of the big questions this budget season is whether or not we are headed into a recession in 2023. Of course, no one can answer that question with confidence. (Some say we’re already in a recession.) But in terms of setting expectations for your organization’s budget, talking through the potential implications of a recession is critical.

This should include, initially, what effect an economic downturn may have on your organization. It should not be assumed that the impact of a downturn will be all negative. Many believe that an economic downturn will help ease inflation, and clearly the Federal Reserve Board is trying to do just that. It is also possible that tightness in the job market that has been impeding organizations’ recruiting and retention efforts will ease if the economy slows down.

Some anticipate a negative effect on donor giving due to declines in both the stock and bond markets (not to mention crypto and other alternative asset classes) in 2022. That has had a chilling effect on planning for major gifts. Your organization must talk through whether you can rely on these larger non-recurring gifts or even on consistent ongoing fundraising to support day-to-day operations. This should inform budgeting for fundraising expenses and potentially programmatic expenses to the extent programs are supported by donor contributions.

For organizations reliant on funding from one or more New York State agencies, getting a sense of that agency’s plans is of obvious importance. Have you articulated your understanding and expectations of State funders’ plans to your governing Board in a manner that helps them understand the constraints and opportunities included in your budget? There are cases where this leads to a sustainability conversation at the program level – can your organization sustain each of its programs given the financial constraints to which the program is subject? Having this conversation as part of the budget and planning process prepares organization leadership and the governance group for potentially difficult decisions to be made in 2023.  Don’t shy away from this conversation.

For some organizations, a period of time where households and individuals experience economic and cash flow challenges drives increased activity. Understanding the effect this may have on such organizations, including organizations providing mental health or substance abuse services, programs addressing food insecurity and homelessness prevention assistance, etc. is critical when planning for 2023. You may face increased demand for services with fewer resources available. You may need to consider alternative approaches, like partnering with other providers or appealing to funders for additional support. If there is a chance that this may happen to your organization in 2023, address that possibility now at the budget stage.

There is value in talking through the potential impacts, both negative and positive, that your organization might experience if a broader economic downturn occurs. Use the budget process to talk about the potential for a recession in a manner that helps the governing Board understand the assumptions you are making about 2023 economic conditions as well as the potential effect those conditions may have on organizational activity and financial results. Do not assume that all Board members understand the relevant implications as they relate specifically to your organization. If you are in the Board member role, pose probing questions when reviewing the budget and get explanations from management.

2. Financial position

The last two and a half years have seen unprecedented disruption as well as unprecedented financial stimulus from the federal government. Virtually every organization has been impacted by these factors. While it may seem counter-intuitive, many organizations are emerging from this disruptive period in a stronger financial position than they were in at the end of 2019.

Understanding your organization’s financial position going into 2023 is important. It is possible that your organization’s ability to avail itself of COVID stimulus funds as you navigated the COVID disruption resulted in an overall improved financial position. This isn’t something to feel guilty about. Legitimately claiming COVID relief funds was the right thing to do given the uncertainties that the organization faced as the COVID situation emerged and developed over time.

The question for your 2023 budget is how to leverage that improved financial condition to move the organization forward most effectively. This could entail something as simple as not needing to use your line-of-credit in 2023. Or it could be something more involved like expending funds on previously delayed facility improvements, paying down debt, terminating a defined benefit retirement plan, expanding programmatic offerings, or addressing some other strategic need/ opportunity.

Other organizations are emerging from this disruptive period with a weakened financial position. It is important that this is understood and addressed as part of the 2023 budget. Talking about sustainability at a program-by-program level as well as at the overall organization level is critical in these situations. Again, don’t shy away from these conversations. Failing to talk about sustainability challenges doesn’t help resolve them.  Delaying this conversation typically only serves to limit your organization’s options later.

3. Articulating assumptions in the context of the plan

If the last couple of years have taught us anything, it is that assuming a “SALY” (Same As Last Year) approach is not workable. You don’t have to predict the future with 100% accuracy to make the budget a meaningful and value-adding process. I have yet to come across an organization that, when its 2020 budget was approved in the Fall of 2019, incorporated a global pandemic, recession, massive federal stimulus, or the other elements that we all experienced in 2020. There will be surprises in 2023; (hopefully not at the level of those 2020 surprises). Your organization will have to adjust to things through the year, just like everyone else.

But don’t let that stop you from being clear about the expectations that are baked into your budget.

One tactic that some organizations utilize to communicate the assumptions underlying their budget expectations in an understandable manner to stakeholders is to present “what if” scenarios. On the surface, this sounds like a lot of work, essentially preparing the budget multiple times under different assumption sets. But it doesn’t have to include a full-blown detailed budget for all scenarios. It can take the form of a narrative that accompanies the numbers.  Stakeholders including management and Board members should ask plenty of “what-if” questions during the budget process.

It is often effective to articulate these types of explanations in non-financial terms. How many people will you serve in your various programs in 2023, as compared to service volume in recent years? How many employees will you have in 2023? Will you expand or discontinue a program? How do planned or potential changes affect the organization’s mission?

You hold the power to derive value from the budget process. Grab the opportunity.

Jeff Paille is a CPA and partner at the Bonadio Group and has consulted with tax-exempt organizations for almost 30 years.