Basics of association budgeting.

Help in understanding the financial picture.

As a board member, one of your most important responsibilities is to ensure that the association implements its mission and strategic plan on an operational level. Your involvement in reviewing and approving the annual operating budget is an important step in this planning process. Likewise, having a comprehensive understanding of the budgeting process will help you perform your responsibility as volunteer leader in the most effective manner.

THE PURPOSE OF THE BUDGET

As an annual financial course of action for implementing the association's strategic plan, as well as a scorecard for monitoring efficient use of financial assets, a meaningful annual operating budget will clearly delineate strategic priorities and ensure that they are being carried out in a financially responsible manner. By forecasting the financial impact of producing products, services, and activities for a given year, a well-conceived budget will help ensure that existing resources are being used properly. An effective operating budget will also provide an important internal control for senior managers as they divide limited resources, react to changes throughout the year, and work together to implement the financial plan.

PLANNING

Budget planning begins with determining strategic plan priorities and forecasts of operational needs to support these activities. While the association's staff typically coordinates this, board members may be involved on a broad level with developing the foundation for what to include.

Staff members responsible for achieving the budget and volunteers who know what is happening in the industry or profession will want to consider any underlying assumptions while undertaking budget planning. For example, it may be helpful to start with a narrative that outlines the key assumptions on which the budget is based - both environmental conditions as well as activities that are planned in support of the association's strategic plan priorities. Included would be assumptions that address the competitive environment of the industry and the economy.

Finally, a meaningful and effective budgeting process will include all staff members with budget responsibilities. This will allow for better coordination of resources among staff and quicker response when management decisions must be made if significant variances occur.

PREPARATION

The association's staff typically drafts the operating budget, integrating all work and resource needs for the year, and then presents it to the board for final approval. However, as a board member you can still take an active, albeit indirect, role in budget preparation. Here are four ways you can become involved.

1. Think through the numbers presented by staff. Revenue and expense figures for each activity, product, or service are best conceived by taking a zero-based approach. This method requires that all figures be generated by justifying each activity or project by detailing the basis for revenues and expenses. Other methods include using the previous year's results and adding a factor based on growth or inflation. However, this may result in missing assumptions that need to continually be revisited.

2. Make sure that forecasts are realistic. Review revenue and expense budgets based on what is expected to happen during the year. Consider actual financial results projected for the current year as well as actual results from the previous year. This will provide a check on ho.w realistic the budget forecasts are.

3. Look at the whole budget as well as its parts. Because the association's budget is an integrated plan, give attention to how all the pieces come together to result in the overall bottom line. It often takes several iterations to come up with realistic forecasts of revenues that balance expenses.

4. Give the board and staff plenty of time to work the numbers. Presentation of the budget to the board for approval is best done before the beginning of the budget's fiscal year, with enough time to put into place resources and reporting capabilities needed to carry out and monitor budget performance.

MONITORING AND EVALUATION

Throughout the year, monitor and analyze the association's financial performance in comparison with the annual budget. Compare monthly financial statements to the annual budget, and look at yearto-date results versus year-to-date budget forecasts. Through this process, you can identify significant variances during the year to give staff management and, if necessary, the board time to take corrective action.

Make sure the board views the budget as a guide, expecting variances to occur. While an effective budget translates the association's strategic direction into a financial plan of action, even the most thoughtfully constructed budget is based on assumptions that can vary, from reality. With effective monitoring controls in place, variances can be continually checked to make sure they fall within the board's comfort zone.

CASH FLOW AND CAPITAL BUDGETS

In addition to the annual operating budget, staff typically prepares a cash flow budget. This type of budget helps increase the efficient use of funds throughout the year by forecasting when excess cash flow may be available for investment or when timing of activities will result in the need for additional funds to pay expenses.

Likewise, a capital expenditure budget is vainable for determining needs for purchasing or enhancing longer-term assets, such as computer equipment and furniture. By considering these longer-term needs, the association can anticipate strategic purchases and the impact these will have on the operating and cash flow budgets. While the full cost of these assets must be included in cash flow projections, only the portion that is depreciated in a given year will be included in the operating budget.

Finally, it's important to view the operating, cash flow, and capital budgets in an integrated budgeting approach because of the full or partial impact they have on each other.

Wayne Miller, CAE, is director of finance and administration, American Health Lawyers Association, Washington D.C. E-mail: [e-mail].