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The Humanitarian Organization is a large aid organization that operates a multitude of programs. The organization depends on donors' contributions for its funding, but is also involved in fee-for-service activities to help generate additional revenue. After reviewing documents and meeting with staff and volunteers, the CFO could not understand how the organization was able to combine all of its programs and projects into a budget document. The CFO proceeded to look for a plan and budget model that would provide a more effective and efficient process. His research brought him into contact with the Secretariat in Public Fund Management, where he was able to learn about best practices in planning and budgeting. It took years of hard work, but in the end, the CFO was able to develop a planning and budgeting process which provided alignment between the organization's strategic goals and operational priorities, enabled effective allocation of capital and program investment resources, and, provided clear performance measurement indicators.

Although it's often seen as a cumbersome process by management, planning and budgeting is an essential activity for any organization. Most accountants dread this time of the year almost as much as the traditional year-end closing and audit marathon. It sets manager against manager, program against program, with everyone having to justify existing resource levels or requests for new funding.

The alignment of strategic goals and budgets for public and non-profit organizations can take many twists and turns. In participation with l'Ecole Nationale d'administration Publique, the Secretariat in Public Fund Management (SPPM) has put together "best practices" for planning ami budgeting in these types oí organizations. These policies incorporate organizations' formal and informal practices and advocate a goal-driven approach to budgeting, which spans the planning, development, adoption, and execution phases of the budget process. The ISPFM's work emphasizes that budgeting must have a longrange perspective and not simply be an exercise in balancing annual revenue and expenditures.

CASE STUDY

The Humanitarian Organization

A chief financial officer (CFC)) started with The Humanitarian Organization in the midst of the organization's planning and budgeting cycle. He had the immediate task oí issuing budget guidelines to managers in order to start the process. Although he didn't know much about the organization and its programs, he spent considerable time gathering information on strategies, operating plans, investment projects, financial policies, etc., including a detailed review of the previous year's budget document.

The Humanitarian Organization is a large aid organization that operates a multitude ot programs. The organization depends on donors' contributions for its funding, but is also involved in many fee-for-service activities to help generate additional revenue. It is overseen by a complex system of local and national governance and involves volunteers to set the organization's strategic direction, approve budgets, and monitor performance.

After reviewing documents and meeting with staff and volunteers, the CFO coutil not understand how the organization was able to combine all of its programs and projects into a budget document. There was no specific operating plan that linked the budget to the strategic goals, budget policies were almost nonexistent, guidelines dealt mostly with accounting matters, performance indicators were nowhere to be found, and the previous year's budget document read more like a statement of intent.

The CFO realized that, although the board spent considerable time ami efforts coming up with a multiyear strategic plan, this plan had little influence on the activities performed in the field. The Organization's programs had been in place for many years and continued year after year with minimal changes. Budgeting was essentially a cost review exercise with efforts spent finding new revenue to fund increasing expenses. It seemed that only a crisis could justify objective review and analysis of programs.

Regardless of the challenge, the CTO put together budget guidelines based on more than 20 years of experience. He developed basic financial and budgeting policies "on the run" to provide for a more rational basis to assess ever increasing demands. These policies were focused primarily on setting expected operating outcomes, price and cost increases, and capital expenditure limits.

As the budget process moved forward, it became obvious that extensive negotiations would be required to address the managers' many "wants and needs." Despite the frequent communication with management, staff, and volunteers, the numbers that vastly exceeded the organization's funding capacity. Furthermore, there was minimal alignment of the budget requests and the organization's strategic goals.

The CFO quickly realized that his most pressing challenge was to find a way to impose order in the process while being respectful of the humanitarian culture of die organization.

After months of intense negotiations, the CFO thought that he had achieved an acceptable balanced budget with appropriate capital spending. The board's review meeting was fast approaching and a final budget document had to be completed ami distributed. Unfortunately, despite the apparent consensus reached with managers, change requests that reflected latest economic conditions or additional programs' needs kept arriving.

In order to meet the board's deadline, die CFO had to make last minute arbitrary decisions, some of which were not well accepted. Discussions with managers and volunteers continued right up to the morning of die Board of Directors meeting.

The budget document was finalized within hours of die board meeting. Tt was a balanced budget with acceptable capital expenditures, but lacked specific operation's targets and had minimal alignment with the Organization's strategic goals. Although there was a separate operating plan presented to the board, it was generic and could not be linked to the financial numbers.

The Board of Directors did approve the budget document but not without concerns. Board members wanted to understand how resources allocated to the various programs related to the strategic goals.They also wanted to see key operating targets and performance indicators that would show whether die Organization was using its resources effectively and efficiently.

After this humbling experience, the CFO summarized his assessment of the planning and budgeting process. 1 Ie noted the following:

1. There were few planning and budgeting policies, rules had to be made on the run.

2. Budgeting was bottom-up without clear focus, based on local wishes.

3. National priorities were neither well understood nor communicated by the regions, and mostly viewed as a hindrance.

4. There was no overall attempt to align operating priorities and strategic goals with resources.

5. There was absence of relevant operating targets and performance indicators.

6. The operating plan and financial budget were prepared simultaneously creating confusion with managers.

7. The final budget document presented to the board contained mostly financial data with very little strategic, operational, or risk assessment information.

The CFO proceeded to look for a plan and budget model that would provide a more effective and efficient process. His research brought him into contact with the Secretariat in Public Fund Management, where he was able to learn about "best practices" in planning and budgeting.

Secretariat in Public Fund Management (SPFM)

Founded in 2005, the SPFM is a non-profit organization whose main purpose is the advancement, promotion and implementation of best management practices in public and non-profit organizations. The SPFAl works closely with the Government Finance Officers Association (GFOA) in Canada and the United States to develop practical models that can help organizations manage and monitor the use of public/donor funds.

Best practices

An annual budget cycle should include a broad scope of planning and decision making based on four key

* Establish broad goals to guide the organizations decision making.

* Develop approaches to achieve these goals.

* Develop a budget consistent with the approaches to achieve the goals.

* Evaluate performance and make adjustments.

A good budget process should:

* Incorporate a long-term perspective.

* Establish linkages to broad organizational goals.

* Focus budget decisions on results and outcomes (budgeting for outcomes).

* Involve and promote effective communication with stakeholders.

* Provide incentives to the organization's management and employees.

As per the SPFM, the budget process must help decision makers make informed choices about the selection of programs and services and the allocation of resources.

The four principles are mapped into an annual planning and budgeting cycle that supports the preparation of a comprehensive budget document covering critical financial and budget policies. An example of the model is presented in Figure I.

Financial and budget policies

Having gone through a chaotic planning and budgeting cycle, the CFO recognized the importance of formalized financial and budget policies and turned to the SPFM for help.

Through its research, the SPFM developed financial and budget policies based upon principles recommended by the National Advisory Council on State and Local Budgeting (NACSLB) and the GFOA.

The SPFM key financial and budget policies are summarized in Figure 2. They are considered fundamental to the planning and budgeting process of public and nonprofit organizations.

The SPFM financial and budget policies are categorized in three groups:

Planning policies

Financial planning policies help organizations establish a more comprehensive long-term view and create a vision towards a sustainable future. They comprise:

1. Long-range strategic and financial planning.

2. Validation and investment projects.

3. Structurally balanced budget.

4. Asset inventory (and management), their valuation, deferred maintenance and sustainability.

Revenue policies

Understanding the revenue stream is essential to sensible planning. Most of the following revenue policies seek stability to avoid potential service disruptions caused by revenue shortfalls. The organization needs to develop policies focusing on revenue diversification, fees and charges, use of one-time revenue, and use of unpredictable revenue.

5. Revenue diversification.

6. Fees and charges.

7. Use of one-time and unpredictable revenue.

Expenditure policies

The expenditures of public and non-profit organizations reflect their ongoing service commitment. Strategic expenditure planning and accountability helps ensure fiscal stability. It is recommended diat organizations adopt debt capacity, issuance and management, reserve or stabilization accounts, and operating/capital expenditure accountability policies.

8. Debt capacity, issuance, and management.

9. Reserve or stabilization accounts.

10. Operating/Capital expenditure accountability.

The financial and budget policies listed above are supported by a comprehensive guide developed by the ISPFM, which provides details on their use. This guide can be adapted to every organization following an initial assessment of die entity's planning and budgeting process. The ISPFM guide is a work in progress that continues to be updated based on development from various groups, including the GFOA.

The implementation of the ten ISPFM recommended financial and budget policies will help the organization:

* Improve its financial management process.

* Reassure stakeholders about the administrative and organizational planning.

* Make the most efficient use of resources in achieving long-term strategic and financial goals.

The use of the recommended financial and budget policies will encourage die development of organizational goals and plans to achieve these goals, and the allocation of resources through a budget process that is consistent with such goals, policies, and plans. Given the evolving nature of good management, budgeting and finance, these practices are not intended as mandator)' prescriptions for the organization. Rather, they are practices that provide a milestone for the organization to make improvements to its financial and budget processes. Implementation of these practices is expected to be an incremental process that can take a number of years.

After gaining a good understanding of the concepts and application of these best practices, the CFO began to apply them within The Humanitarian Organization. He soon discovered that it was a much more difficult task than he had initially expected. Board members and staff could not understand why all this work was necessary and why planning and budgeting had to be an ongoing process. There were also some internal struggles to understand die meaning of die ten financial budget policies and subtle resistance to the need for increased transparency and accountability.

It became clear that these policies would have a considerable impact on the Organization's planning and budgeting practices, but also in many other aspects of its financial and program management. Most importantly, the board and senior management had to be convinced to adopt diese policies as part of their ongoing governance role.

The CFO spent considerable time selling these "best practices" to board members all the way down to operations' managers (including accounting staff). It took many years of hard work, but in the end, the CFO was able to develop a planning and budgeting process which provided alignment between the organization's strategic goals and operational priorities, enabled effective allocation of capital and program investment resources, and, provided clear performance measurement indicators. More importantly, it presented key stakeholders with an objective view of the organization's planning and budgeting process.