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A business approach to budgeting.

WHAT IS THE TRUE COST OF EVERY MEETING YOU HOLD AND EVERY BOOK YOU PUBLISH? HERE'S ONE SYSTEM FOR DETERMINING PROFITABILITY BY PROJECT.

Like many associations, the American College of Emergency Physicians (ACEP), Dallas, took a traditional approach to budgeting. Monthly reports showing revenue and expenses by department or project, coupled with comparisons of projected and actual revenues, provided information on the association's financial status. Any divergence from expected performance meant developing short-term strategies to reduce expenses or increase revenues.

Strategies that lead to short-term successes, however, can have negative consequences in the long run. ACEP discovered this in 1985. That is when an analysis of our revenue-and-expense history made it clear that if we continued to take the traditional approach to budgeting, a deficit would result.

Specifically, our practice of realizing all expenses for a project in the year it was developed--rather than spreading the expenses over the life of the project--was absorbing the small increases in revenue being generated through member dues. This practice severely limited ACEP's ability to develop new projects, whose revenue could be used to meet the increasing member demand for non-revenue-producing services such as government affairs and emergency medical services.

Clearly, the effects of a deficit would be difficult to reverse.

One option was to substantially cut back money-losing programs and terminate the staff associated with them. This would have had negative repercussions among ACEP's 16,000 members. At the same time, it would have lowered the morale of the employees who remained. Wondering about the future of the organization, they might have shifted their focus from performing their responsibilities to exploring other employment opportunities.

Another option was to raise member dues to support our ever-expanding program base. ACEP, founded in 1968, is a young organization and feels pressured to provide many services to help members compete in the medical-hospital arena.

The analysis showed we relied heavily on member dues, but our membership numbers were not increasing at a sufficient pace to pay for all the services. And given ACEP's predominantly young members, physicians just starting in practice, increasing dues to support program expansion was not a viable alternative.

Becoming market driven

With the assistance of a consultant, ACEP moved in a different direction: We adopted the business philosophy of becoming a market-driven organization that provides services within lines of business. Like a corporation that includes numerous businesses--each a self-contained operation--ACEP views its work as falling into the following five separate lines of business:

1. Meetings. ACEP holds approximately 20 meetings per year.

2. Publications. ACEP offers about 30 publications for sale, with four to five new titles added each year.

3. Member services. This business line includes activities such as membership recruitment, a monthly scientific journal, an annual membership directory, an affinity credit card program, and a variety of insurance programs.

4. Policy. This business line encompasses a number of program activities--emergency medical services, reimbursement, and government affairs--and leadership operations, such as the board of directors, councils, and liaisons with other organizations.

5. Administrative services. This area includes internal operating departments such as finance, plus management services provided to other organizations, such as ACEP's operation of the American Ambulance Association's accreditation program.

Here's an example of how our business approach works.

In the meetings line of business, each meeting has three budgets: development, implementation, and promotion. The education department designs and develops the meeting, the convention services department implements the meeting, and the promotions department sells the meeting. Each of these departments has a separate budget covering its individual activities related to a meeting. The three departments' individual project budgets roll up into one overall cost center.

Most activities have their own project codes and staff budgets for the number of hours needed to complete the projects. Additional budget items include printing, postage, travel, and telephone, to name a few. The publications line of business, for example, has separate budgets for development, production, and promotion of each publication.

ACEP's philosophy is that the true cost of a publication--or a meeting or a service--is not identified unless the costs for items often considered as overhead (finance, computer services, mail room, and so forth) are applied. Consequently, indirect costs are also allocated to budgets based upon established formulas.

This accounting method lets us determine the overall profitability of a project in terms of revenue and expense. It also enables us to determine the source of the expenses. The system provides for greater accountability by each manager and helps us make more informed decisions when a problem arises.

A yearlong process

Critical to ACEP's success in operating from a line-of-business perspective is its yearlong planning and budgeting process. The process begins in August with the development of budget targets for revenue and expenses. Throughout the fall, each line of business holds staff planning meetings to identify strategies that will help achieve the budget targets while remaining consistent with ACEP's values.

Staff decisions are guided by background materials, such as ACEP's annual environmental assessment. The environmental assessment looks at economic indicators, the priorities of federal and state governments, the current focus of hospitals and payers of health care costs, and consumer attitudes toward hospitals and physicians. The organization's long-range plan, which contains five value statements and accompanying achievement objectives, also guides the planning discussions.

For example, one of ACEP's five values states, "There is a body of knowledge unique to emergency medicine that requires refinement and development." A business objective is to realize 10 percent net revenue on the meetings line of business. Staff, with input from committees and special-interest sections, identify educational meetings that are consistent with the unique body of knowledge and also have the potential to meet the budget target.

When the first round of planning meetings concludes, staff assign priority rankings to the possible strategies and begin researching the higher-ranked ones. Often, staff complete a product or policy development questionnaire to assess a strategy's viability.

The second round of planning meetings, held about a month later, calls for specifics: What are the risks associated with doing--or not doing--the project? Who is the competition? How many registrants can be expected?

The discussion then broadens to include the tactics necessary to achieve successful implementation of a proposed strategy. If a new meeting is being explored, and it will be marketed to nonemergency physicians, discussion will focus on tactics tailored to that market. Should we develop a large meeting in a central location or should we develop a packaged course that can be implemented at a variety of sites?

Upon conclusion of the planning meetings, senior staff present the recommended strategies, in the form of projects, by lines of business. The board of directors receives the entire list of ideas--both those recommended as well as not recommended for budgeting. In this way, the board can ask staff to prepare a budget for an activity not recommended by staff but identified by the board as a priority.

Next, staff develop budgets for approved projects, consolidating them within the appropriate lines of business. Normally the proposed projects generate more expenses than revenue, so cuts need to be made either by reducing entire projects or eliminating certain expenses within a project. Staff continue to refine the budget before its final submission to the finance committee and the board of directors.

The approved budget goes into effect on July 1, and the process starts all over again in August for the next fiscal year.

Organizational considerations

Implementation of a business approach affects not only planning but also the underlying organizational structure and practices.

Accounting practices. To plan activities around lines of business, you must know how much those activities cost. Appropriate allocation of both direct and indirect costs becomes essential.

Staff organization. In addition to coordinating financial information by the lines of business, it is important to coordinate communication on lines of authority.

As an example, take ACEP's meetings line of business. The three major components within that business--education, convention services, and promotions--are in the same operating division and report to a common supervisor. This facilitates intradepartmental communication and creates a structure for resolving problems and disagreements that may occur between departments working on a common objective.

Performance reviews. Planning and conducting activities around lines of business affect the way in which formal performance reviews are conducted. ACEP first ensures that individual performance accountabilities are consistent with its business objectives, then establishes targets and measures to properly evaluate that performance.

For example, we expect our meetings line of business to generate a 10 percent excess of revenue over expenses. Once budgets are established, we ensure that the target is met. We then expect department managers to meet their budgets.

Once you begin holding individuals accountable for the success or failure of a product, how do you reward those who succeed? In most businesses, rewards usually take the form of incentives or bonuses. Therefore, an evaluation of whether it's appropriate for an association to institute a bonus system is necessary. ACEP faced this issue and, as a result, adopted a formal incentive compensation plan in 1991.

Pluses and minuses

In some ways, implementing a business planning approach will increase an association's costs. The need for increased record keeping and financial controls, for example, will probably increase personnel and equipment costs.

A business-planning approach requires the ability to collect and analyze data. The computer hardware and software necessary to support the infrastructure may drive up costs initially, but they will enable an association to gather and analyze marketing information and details about product sales.

The amount of time--and cost--an association incurs in planning will also go up. For some associations, it won't mean an increase in time--merely a different way of spending that time. Associations that do not spend a great deal of time on planning will find their effort increases. Still, if done properly, the process should increase revenue to offset increased expenses as well as decrease expenses in other areas.

ACEP has nearly 100 employees who collectively spend 5,375 hours on the planning and budgeting process. Given that ACEP has experienced an average 12 percent annual growth in revenue over the past six years, we believe the time is well-spent. In the publications line of business alone, revenue has quadrupled, from $250,000 to more than $1 million.

You'll also need to consider the bureaucracy that develops under this system. An organization does not want to act upon whims; it wants to ensure the products and services it offers will be accepted by the members.

Yet an association can't always wait for all the answers before making a decision to move ahead. If the planning process becomes highly sophisticated or too cumbersome, the organization may get bogged down and move too slowly to respond to opportunities in the marketplace.

ACEP has found that a more formal planning structure gains mutual consensus among staff and members as to what activities should receive top priority. Members and staff are more likely to agree on "what is the right thing to do." That is not to imply there won't be dissenters. Rather, proper business planning can lead to an increase in the number of "consenters."

Overcoming objections

If you move to a business-planning approach, expect resistance from some volunteer leaders as well as employees. The common objections you'll hear will include the following:

"Decisions will be based solely on profit margin." It is not uncommon to believe that decisions in the "business world" are based on cold, hard, financial facts and that human interests take a back seat. Many members and staff will have concerns that the association's decisions will depend upon what's good for the bottom line rather than what's good for the members it serves.

As an association begins to operate more like a business, there is no question that certain programs must generate a positive bottom line. A profit within an association is generated by members purchasing the products and services offered by the association. Therefore, if programs are successful and profitable, it's because members are using the products and services. And if that is the case, members are doing so because they perceive a benefit from the products and services offered.

Profit margins are not a goal--they provide a helpful tool to evaluate whether the association is truly meeting the needs of its members. And it's important to communicate that not every program must make a profit. ACEP, for example, conducts an annual leadership conference that is free to officers of its 53 chapters. The college considers the conference an investment in its future.

What's needed is a conscious decision about which programs will generate a profit and which will be supported by the profits from other programs. Whether or not an association program is profitable, it must meet the needs of a significant number of members.

"We are not in business to make a profit." Many members and staff believe an association's nonprofit status means no profit. They think the organization should break even. As every association executive knows, organizations that break even eventually break down.

In short, "nonprofit" is a tax classification, not a mental status. Both members and staff have the responsibility of ensuring that the association generates sufficient funds to carry out its mission. Financial stability, which is critical to any organization's ability to achieve its mission, cannot be achieved without the production of revenue in excess of expenses, otherwise known as "profit."

"A business approach will increase competition between staff and members." Volunteers may be concerned that a business approach will lead to a staff-driven organization. To be effective, however, a business approach requires the active participation of both groups.

As Peter Drucker has often noted, it is not only important to do things right but also to do the right things. Identifying the right things to do is the board's responsibility, with the assistance of staff. Doing things right is largely the staff's responsibility, with the assistance of the members.

For staff to buy into this new approach, they must be convinced from the outset that senior management shares accountability for successfully reaching targets. The team approach to business planning is not a glib euphemism. This process can work only if each member does his or her job.

At ACEP, we all share in the success or failure of our lines of business. An educational meeting, for example, will not succeed unless it is built upon a sound idea and appropriately developed. Even the best idea will not succeed if the meeting is held in an undesirable location or is poorly implemented. And no matter how wonderful the meeting site and speakers, no one will come unless it is properly promoted.

ACEP's executive director, deputy executive director, senior staff, and everyone throughout the organization share in the accountabilities for reaching targets. Everyone's performance is rated accordingly. Therefore, accountabilities must not only be shared but also be realistic and achievable. The best way for staff to buy into the process is to have them succeed.

Minor modifications

What changes would we make in the process? We constantly ask this question. For us, the planning and budgeting process is constantly under revision.

Over the years we have changed the way we review current activities to determine if they should continue. We've changed the way we analyze and evaluate ideas, modifying our product and policy development questionnaires accordingly. Realizing that product planning happens continually, we have allocated more time on the schedule for idea generation and development.

We have also identified the need to develop an acquisition process. Product development can become an expensive and time-intensive undertaking, so we are looking for ways to identify products in development that can be acquired by ACEP and offered to members more quickly than if we developed the products ourselves.

One thing we would not change is our commitment to business planning. More than ever, associations must operate like businesses--businesses that offer products and services to their constituencies and reinvest profits to enhance their ability to meet their missions.

Colin C. Rorrie, Jr., a member of ASAE's Government Relations Section, is executive director and Michael E. Gallery, CAE, a member of ASAE's Finance and Administration Section, is deputy executive director of the American College of Emergency Physicians, Dallas.
COPYRIGHT 1993 American Society of Association Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Gallery, Michael E.
Publication:Association Management
Date:May 1, 1993
Words:2700
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