Capacity: Budget

Image: Street art featuring several colorful birds and their shadows. This photograph was taken in Provincetown, MA.

Image: Street art featuring several colorful birds and their shadows. This photograph was taken in Provincetown, MA.

Almost everyone has an instinctive understanding of money as an element of operational capacity, and that instinct isn’t a bad starting point for thinking about budget’s impact on capacity in an organization. Organizational decisions about money (and all other capacity questions) have two different modes that you are likely familiar with from your personal life:

  • the “right now” conversation — do we have enough cash to pay this bill right now?

  • the “over time” conversation — how will we ensure we can continuously generate income that we can rely on so that we can sustain the ongoing uses for that money.

Moving toward operational excellence means moving away from constantly focusing on the “right now” and designing and re-visiting operations from an “over time” or “ongoing” mindset, which helps organizations use available money more effectively as a resource while planning for its related constraints.

Budgeting For Operational Capacity

This video is a simple illustration of money over time.

Strategy sets out the organization’s goals; the operating model identifies at a relatively high level how that goal will be met and how the organization will know it’s succeeding. A core leadership activity in any organization is deciding how much available funding to allocate, to which parts of the organization, for what reasons, and for how long. In an aligned organization, the initial decision for new funding allocation is made with reference to the strategy as well as existing commitments, and ongoing, annual budget decisions are made with reference to the operating model so that critical operational needs are not overlooked or short-changed during budgeting.

We all know some basic realities about money:

  1. We have to do something to get money to come in, it doesn’t usually just show up.

  2. The more money that can be relied upon to come in regularly, the more we can plan to spend.

  3. The more we rely on a certain level of spending, the more we rely on an equivalent level of income.

Put another way, there’s money flowing in, and money draining out, and leadership has to decide how to deal with all of it based on what’s happening right now and what is expected to happen in the future. The video is a very simple illustration of this idea, which is a good start to understanding how we approach budget and operational capacity. The goal is to not spend on an ongoing basis more than you have access to on an ongoing basis, while building up some operational reserves without stockpiling cash (unless it serves some strategic need). Even at this overly-simplistic level, it isn’t easy to keep things in equilibrium!

All operational capacity planning — trying to keep these forces in balance while planning for the future — is driven by access to resources and their related constraints. Put another way, you may want to ask: what do you have to work with, how do you get access to it, and what puts limits on your access to it?

When we plan capacity for change initiatives, we expand these questions to ask: which constraints are preventing us from reaching our goals, how can we permanently adjust those constraints, and what resources do we need at what levels to sustain our post-change world?

As you might imagine, the resource that our clients think about the most is money, because it often has the most immediate and obvious impact and is subject to many well-known constraints.

Money as a Resource

Money’s role as a resource in your operations ecosystem is fairly straightforward: it allows you to pay for things. It is required to pay for the basics of keeping the doors open, like state incorporation fees, audit fees, a web site and email, and whatever expenses are tied to program delivery. While it can pay for buildings, technology, improvement initiatives, and staff salaries, it cannot purchase the other core operational elements - time and energy.

Money can sometimes be used as the sole resource available to temporarily address a problem or cope with something unexpected - for example, bringing in temporary employees to deal with a sudden increase in demand, or buying supplies to deal with a natural disaster. Attempting to use money as the sole resource available to permanently change an organization’s operations will always fail - think of all of the times you’ve endured yet another expensive purchase of some new technology that didn’t result in any type of positive operational change (and may have made things worse). Understanding the interaction of money, time, and energy on your operations will help you use your monetary resources more effectively.

Constraints Related to Money

Every organization makes strategic (long-term) and tactical (immediate) decisions about how to use its money. Often, those decisions are driven largely by the constraints impacting that money. Some of the more consistent constraints are outlined below.

The most well-known constraint that applies to money is captured in the cliché “it takes money to make money.” Fundraising efforts have costs. Schools have to spend money on buildings and other infrastructure and hire teachers before they can charge tuition. Once an organization is up and running, it is critical that sufficient money is planned and allocated to support the operations that let it bring in money. While this is not a constraint that can be removed, it is impacted by strategic plans and the operations that support them.

There are often legal, regulatory, and donor-imposed constraints that limit how money can be made, used, and accumulated, as well as imposing restrictions on how it is accounted for. Unlike just about any other constraint, this is not something that can be removed or adjusted much, so any costs associated with compliance must be included in ongoing planning.

Less obviously, the frequency of income can be an important constraint. While all organizations have this constraint, the planning implications vary - if, for example, an organization relies on individual giving, it must manage its budget differently than an organization that receives state grant funding. While this constraint is not fully in any organization’s control, organizations that take deliberate action to minimize volatility in their revenue streams are better able to plan and budget, which in turn allows for the kinds of operational improvements that can result in sustainability and efficiency gains.

Summary

While everyone has some experience managing money, most of us are not practiced with thinking about both the “right now” an “over time” or “resource” and “constraints” aspects of money management. While the simple view of managing money to balance income and expenses while building appropriate reserves is easily understood, it isn’t easily done. As we will explore in the next parts of this series, money is most impactful when understood and managed in the context of the other two key aspects of capacity planning — time and energy.