Budgets and balance sheets and audited financials have a tendency to simultaneously over-simplify and over-complicate organizational life. The way they appear on a page suggests a linear, logical, orderly aggregation of resources in clean compartments, even when their categories are deeply inter-related. The right-aligned columns of actual integers can seem rigid and exact, even as our intuition knows that Money is always fluid and changing.
Which is why it’s helpful to have a few clear and consistent principles about Financial Management, to ground your number-wrangling in some larger context.
Flickr: Pictures of Money
There are many such principles for nonprofits, at various levels of depth and complexity (the Nonprofits Assistance Fund has a great bundle of them). But one approach that keeps spinning in my head is the four principles developed (and recently revised) by the financial software folks at You Need A Budget (YNAB). These are intended for personal financial management (not organizational), using cash-based accounting (not accrual). And they don’t focus on (or even mention) nonprofits. But still, the four rules have some utility and simplicity worth attention (video available below):
- Rule 1: Give Every Dollar a Job
Every dollar flowing into your enterprise needs to be assigned a specific purpose. YNAB encourages you to ask: “What does this money need to do before I get paid again?” That’s a cash-accounting- based question, so an organizational form might be: “What does this money need to do?”
- Rule 2: Embrace Your True Expenses
YNAB considers “true expenses” as including all monthly, infrequent, and big-ticket future costs, normalized over time. So, considering your future holiday purchases and dividing them by 12 will smooth your cash flow and ease your anxiety. This rule shouldn’t be confused with “true costs,” which tends to mean capturing fixed and overhead costs related to any project. But the idea of normalizing all recurring, occasional, and infrequent expenses makes a lot of sense.
- Rule 3: Roll with the Punches
The YNAB team recognizes the tendency to consider a budget, once constructed, as an ever-fixed mark…inducing guilt and panic whenever it turns out to be inaccurate or inapplicable. Their response is: get over it. You can’t know the future when you make your budget, so accept and adapt it as you discover new things.
- Rule 4: Age Your Money
This one is actually an elegant bundle of many financial issues for individuals and organizations. In the nonprofit world, we talk about “cash reserves” and “liquidity,” and use a bunch of scary ratios to figure out how quickly we’d run out of cash in a crisis. YNAB’s approach is to encourage people to develop a time cushion between when they get a dollar and when they spend it. They used to call this “living on last month’s income,” but that proved to be too rigid and mechanical for people with variable income. This is a friendly and flexible approach to building slack into your financial plan.
Of course, there are many disconnects between YNAB’s rules and the complex, accrual-based, IRS-approved financial life of a nonprofit arts organization. But as a set of basic and integrated principles, it’s pretty darn cool.