How Nonprofits Can Move to Outcome-Based Budgeting
Nonprofits have traditionally relied on zero-sum, line item, and program-based budgeting techniques to help guide board and management decisions. But many nonprofits can better align their resources with outcomes and strategic priorities by making the shift to outcome-based budgeting (OBB). Organizations that have taken the plunge and moved to OBB have seen improvement in their financial standing while bringing their full organization and its mission into the budgeting process.
CliftonLarsonAllen’s second quarter Nonprofit Roundtable Series looked at how OBB differs from traditional budgeting, and gave participants insight on whether it makes sense for their organization.Here are a few of the ideas coming out of the series:
- Know your strategic and financial standing when assessing if OBB is right for your organization. OBB starts when desired results are linked with strategic priorities, so developing a well-defined strategy is an essential part of the OBB process. Also, make sure you have the financial capacity to develop an OBB approach; organizations with recurring deficits may have more difficulty implementing such a system.
- The outputs (i.e., goods or services produced) of a nonprofit organization are often not the same as the desired outcomes (i.e., strategic goals). Outputs are the “how” or the “what we do” to achieve the mission or outcome. Organizations that understand how their outputs support their desired outcomes will be in a better position to implement an OBB approach.
- For example, an organization whose mission is to reduce homelessness in the community can measure its outputs by how many families find shelter through the organization; however, that may not be enough for the organization to truly understand if they are reducing homelessness. If the organization understands how the number of families sheltered reduces the homelessness rate, it would be better positioned to budget resources to achieve desired outcomes.
- To measure OBB success it is critical to develop efficiency indicators for both outputs and outcomes. This enables department heads, management, governance, and other users to understand if budget levels are achieving desired results. Transparency, in turn, shows stakeholders how the organization is spending its resources and the results of spending. Openness of this sort becomes increasingly important as stakeholders look beyond the traditional comparison of program spending percentage and total costs to measure a nonprofit’s impact.
The implementation of OBB is often evolutionary versus revolutionary. It is not necessary to implement OBB across all departments and funding streams at the same time. An incremental approach can assist leaders in understanding the cultural changes necessary to adopt OBB throughout the organization. Before you start, consider the pros and cons of an incremental approach versus full adoption.