Buckle up. We’re talking about a specific budgeting strategy called Values-Based Budgeting, which we originally learned about from BridgeSpan. I know… riveting topic, Michael. Trust me, I wanted to write about the Giants, but I figured it would be better to write about something nonprofit related. We actually have had many nonprofits ask us about this concept, which is why I’m highlighting it in this post. I personally think more nonprofits should be using this in their budgeting process.
To say this past year and a half has been filled with uncertainty would be a vast understatement. Many nonprofits have been forced to make seemingly impossible financial decisions that have been painful for many. However, as we move into the future, the dramatic lessons learned should not be soon forgotten. Being able to move quickly in the face of uncertainty is something every organization needs to think about, but as many of us have learned, it is hard to prepare for something you do not see coming. Values-Based Budgeting is a wonderful tool to utilize that centers your values at the heart of your decision making process. This tool can be used beyond doomsday scenarios (although it’s especially useful when faced with higher levels of uncertainty) to make strategic financial decisions when faced with tough questions.
What exactly is Values-Based Budgeting?
I am a firm believer in keeping things simple when it comes to any organizational financial decision, which is why Values-Based Budgeting is so nice. It’s a relatively simple and aptly named concept. It boils down to this:
Values-Based Budgeting is a framework that gives your financial decisions a purpose based on your values as an organization.
When creating or evaluating a budget, it can be so easy to get lost in the zero-sum game of having to make cuts or allocating funds throughout the organization in a ‘rob Peter to pay Paul’ fashion, but focusing on that zero-sum game can sometimes result in budgeting decisions that are based on unconscious bias, favoritism, apathy, or exhaustion. It can often end up feeling directionless. Values-Based Budgeting forces organizations to preemptively identify values, create value statements that describe how the organization interprets those values, and apply the value statements to situations that arise throughout the year.
As with anything in the nonprofit space, a project or program needs a sense of direction or purpose. That direction or purpose ties directly to the mission of the organization. Without a direction or purpose, nothing would get done. Values, while related to direction and purpose, are different. Values are an organization’s principles. Organizations with similar directions, purposes, and missions might hold different values which affect how they work, act, and respond. I will call out some common values organizations need to think about in more detail later (and correlate them to Values-Based Budgeting of course!), but I want to explore an example of how a nonprofit can leverage this concept to better inform financial decisions.
Value Statements Streamline Responses to Uncertainty
In this example, we are going to examine the work of a fictional nonprofit – BuildUP – that works in the affordable housing space. BuildUP is looking at building an affordable housing project. While the affordable housing project is meant to address the housing shortage for low- to moderate-income households, this organization is very cognizant of their environmental impact. In this case, environmental impact is a key value for this organization. Every decision the organization makes from structure type, layout, materials, etc. (all of which have budgeting implications) should have a tie to that value. As you can imagine, there are certainly going to be some tough budgeting decisions along the way.
When assembling the project budget, BuildUP has many decisions to make. Many things neatly fit into normal expectations. Take the foundation for example. There’s only so many ways to lay concrete and city code is pretty prescriptive. However when it comes to materials and design choices, there are many options. Some of these options will tie to one or more of my values, while some of them won’t. The organization might ask questions like: ‘What type of material do we want to use for exterior facing walls?’ or ‘Why type of windows do we want to use?’ Even though it will probably cost the organization more money, BuildUP has made the decision to find locally sourced materials that minimize the project’s carbon footprint. There definitely will be a tradeoff with cost, but the organization wants to make sure the project speaks to mission and values.
When it comes to other elements of the project, the decision might be much easier. For example, the organization might ask “What type of paint do I intend to use in the interior?” Regardless of the type of paint, it probably won’t have a major impact on energy-efficiency of the project. It could potentially have an impact on affordability of the project, though, so the organization might choose the cheaper paint to help keep the units affordable. Still mission and values aligned.
So far, we haven’t discussed anything groundbreaking. Organizations align budgets with their missions every year and in every city across the country. Where the biggest benefits of Values-Based Budgeting come into play is when there are black swan events or in times of unexpected uncertainty. Let’s throw a wrench in BuildUP’s affordable housing project to see how this budgeting model works.
The project has broken ground and everything seems to be going swimmingly for the first few weeks of construction. Without warning, a key funding partner unexpectedly backed out of the project. After reforecasting the budget, BuildUP determines that the project can still move forward but the project budget must shrink significantly. All of the previous budgeting decisions will now have to be reevaluated. Many options exist, including:
- Reduce cost by sourcing materials that are less expensive (sacrificing environmentally friendly options) to maximize number of units built
- Keep all environmentally friendly elements and materials, but reduce the number of units built (even if less units are built under this option)
- Pivot to a mixed-use development where market rent units subsidize affordable units (resulting in less affordable housing units)
What lens do you apply when faced with difficult decisions? Traditionally, nonprofits evaluate these situations from a purely economic and social impact perspective (i.e. What makes the greatest impact for the population we serve?). While it is necessary to pay attention to mission and economics, it doesn’t necessarily consider the values of your organization.
Values-Based Budgeting is an opportunity to center your values in decision making. If BuildUP had created a value statement from the beginning like: ‘We will minimize the environmental impact of our project – no questions asked’, their course of action would be clear. In this situation, they would scale back the size of the affordable housing project while keeping all environmentally friendly elements. However, if their value statement was ‘Environmental concerns are only second to maximizing mission’, their course of action would be different. Perhaps they would look at scaling back costly energy efficient project inputs in order to reduce the number of units that had to be cut from the plan modifications.
How Do Nonprofits Create Value Statements?
Assuming you’ve made it this far, you’re probably wondering how to implement this in your organization. Before we show you, it’s worth mentioning that this is just one example and we have provided some of the more common values of organizations in the next section. Your organization probably will have different values than neighboring organizations and those values will impact your financial decisions differently. Without further delay, let’s take a look at how to operationalize Values-Based Budgeting.
First thing is you need to identify your values (see next section for ideas). Once you have your values, I’d recommend creating values statements that could apply to your organization. For example:
|Environmental Impact||– We will minimize the environmental impact of our projects.|
– Environmental concerns are second only to maximizing mission.
– We strive to increase equity by reducing environmental impact in the communities we serve.
– Long-term environmental impact is more important than short-term environmental impact for our projects.
Once you have a list of possible value statements, you should select the one that is most important to your organization and use that as a framework for building a budget. Aligning both your values and strategic intent are important. You would have to do this with each of the values you identify. We’d certainly recommend engaging a variety of stakeholders with diverse perspectives and experiences in this process to ensure you are aligning your organization with the needs of your stakeholders and community. At the end, these values should be voted on by your governing body and reevaluated annually.
What Are Some Other Examples of Values?
As with many other financial decisions, there are always going to be situations where there are unexpected costs or revenue losses which will make it difficult to execute the original plan. Values-Based Budgeting allows you to make decisions that will be values-aligned. In times of uncertainty or hardship, having a core set of value statements will make tough budgetary decisions easier and will allow your organization to respond quicker. Environment was just one example. There are many values that you can leverage in the same way. Let’s talk about some of the more common values and give them some context.
MISSION. It’s what drives your nonprofit organization and addresses a need in your community. Why not set your Values-Based Budgeting around your mission statement? If your organization provides critical services to the community, think about whether it makes sense to structure your budgeting needs around maintaining or, conversely, growing your core programs. When upgrading technology, should you prioritize items or processes that will improve the effectiveness of your core programs or do you want to maintain current systems? If faced with a need to make cuts, your actions would be different depending on how you deliver your mission.
PEOPLE. They are your most important asset, so you need to think about how you value them. If your revenue was halved overnight, would you rather retain staff to the detriment of programs or would you rather retain only your best staff members to keep most of your programs fully funded? Is employee health and wellness more important than mission delivery? Would you rather let a few staff go or furlough everyone? People might not always be permanent within your organization, but the impact you have on their lives is permanent. Deciding what you value and how you value it is often difficult but also necessary. Gaining consensus about values can provide answers to these types of difficult decisions.
EQUITY. This is another value that is already embedded in many organizations’ work. If your organization is providing services or employment to diverse people (which we hope is the case), not all budget decisions have the same impact on the same people in the same roles or positions. You should take into consideration the equity of your budget decisions as it fits with your values. An example of this could be senior staff receiving a larger share of pay cuts. Your organization may decide to shift resources during a recession to ensure a specific community maintains access to resources due to the fact that other communities will not be as impacted by the recession. Be transparent with these decisions, as these are values that make your organization unique and impactful.
SUSTAINABILITY. No matter how big or how small, if you are looking at your budgeting decision through the lens of future sustainability, it will greatly increase your organization’s ability to maintain future sustainability. If we are trying to make that decision in the moment of a huge budget loss, it is going to be very difficult. If a major funding source is lost, do you double down on development and marketing costs to make up for lost revenue or do you cut expenses to match revenue levels? Does your organization prioritize revenue diversification or is your organization focused on increasing existing revenue streams? Identifying how your organization values sustainability may be an important conversation.
Values-Based budgeting is a mindset shift when it comes to making budgeting decisions. On a basic philosophical level, we believe most people can agree it is much better to operate from a mind-frame of value than scarcity. This budgeting strategy can better align your organization to your strategic intent and allow you to respond to uncertainty in a thoughtful, intentional manner.