Using surplus budgeting to advance and sustain your mission

How Ducks Unlimited employed financial discipline to build vital reserves
By Maria L. Murphy, CPA

Using surplus budgeting to advance and sustain your mission
Image by slowgogo/iStock

Like many organizations, Ducks Unlimited endured financial hardships in 2009. The world's largest private not-for-profit waterfowl and wetlands conservation organization ran a deficit that year, and at fiscal year end (June 30, 2009) had negative unrestricted net assets of about $1.5 million. This meant that over its 75-year ­history, DU had spent approximately $2 million more than it had earned.

DU followed procedures used by many not-for-profits, developing annual budgets and responding to deficits by cutting annual spending. But it had not monitored and forecast unrestricted net assets and cash flows. The organization's mission is to conserve, restore, and manage wetlands and grassland habitats for North American waterfowl, but that mission was jeopardized in 2009 by the lack of operating reserves.

"For not-for-profits, there can be no mission delivery without financial strength," said Bob Mims, CPA, CGMA, who was DU's controller and director of investments and recently left the not-for-profit to work as a consultant. "And there must be a long-term strategy for creating operating surpluses and monitoring unrestricted net assets and cash flows."

In fiscal year 2016, DU's revenues exceeded $221 million, and the organization had almost $64 million in unrestricted net assets. Thanks to a focus on building financial strength, the organization's mission was on much sounder footing than it had been seven years earlier.

REVERSING A NEGATIVE TREND

A change in focus occurred in 2009 after a new CEO, Dale Hall, joined the organization. One of his first objectives was to gain an understanding of how the organization functioned and communicated. "We knew that we needed to have a good organization to have a good mission," said Mims, who is a member of FASB's Not-for-Profit Advisory Committee, "because if the organization goes away, then the mission goes away."

Hall decided that he needed to create greater unity within the organization, "Team DU." He made efforts to eliminate the functional silos that often exist at not-for-profits. While program and fundraising areas are usually aligned in their objective to raise funds, administrative areas (human resources, accounting, legal, and information technology) at some not-for-profits are more focused on how the organization performs and in servicing the other areas.

"Not-for-profits are often conflicted because they have to determine whether the organization's mission or sustainability is paramount. It's really both," Mims said.

The board of directors under the leadership of president John Newman reviewed DU's financial situation and led a charge to reverse the negative accumulated unrestricted net assets. DU called this getting "out of the ditch."

The board also engaged the executive team to begin working on a five-year strategic plan for 2012—2016 with staff representatives from functional areas and key volunteers. The strategy had three simple objectives (the "3 M's"):

  • Program—"Mud": Increase the number of acres of wetlands restoration in North America.
  • Fundraising—"Members": Grow the number of supporters to 675,000 adult members through direct response, events, major donors, corporate relations, advertising, and philanthropy.
  • Administrative—"Money": Create $10 million in operational surpluses (unrestricted net revenues over expenses) for the five-year period and increase unrestricted net assets.

A surplus budgeting strategy was adopted to accomplish the third objective and give DU a stable foundation with the goal of keeping its mission intact (see the sidebar, "Surplus Budgeting Tips").

MANDATING A SURPLUS

A staff team was appointed and charged with developing a national business plan in 2011 with quantifiable objectives and a financial model. The board also appointed Bill D'Alonzo to chair the Business Planning Committee that would vet the plan and to monitor the objectives for accountability.

"You can't do a five-year budget, so the business plan provided a guideline and served as a connector to bridge the strategic plan objectives to the annual operating budgets," Mims said.

The Business Planning Committee encouraged those involved in developing the annual budgets to start with a blank piece of paper but to have $2 million in operating surplus as a fixed amount at the bottom of that page no matter what else they did.

DU's fiscal year ends in June, so the annual budget process took place in the winter, and budgets were approved in May. Budget versus actual results were monitored in the six months ending in December, and the organization forecast where it was going to come out for the year so that the budget could be adjusted for the second half of the year.

"In down years, it might not be possible to meet the operational surplus target through cost cutting and to correct in the second half of the year; so subsequent-year budgets might have to be evaluated and adjusted to meet targets," Mims said.

If the organization overachieved and found itself ahead of target, there was a negotiable process for the budget to have a lower surplus in future years, subject to approval by the Finance Committee. This occurred in years three through five due to the success of philanthropy and cost efficiencies attained by program delivery staff. Lowering the surplus budget targets enabled greater mission delivery. The board created checks and balances between the three strategic objectives; both staff and volunteers bought into this approach. Different functional areas were encouraged to share ideas and work together with an expectation that these functional areas be realistic about levels of philanthropy, and revenues versus expenses. Over the five-year period, the Finance Committee, chaired by treasurer Wendell Weakley, instituted an analytical process that looked at both philanthropy and costs, where future targets could be lowered if present targets were exceeded.

"Like most not-for-profits, budgeting is not everyone's favorite exercise because it becomes a negotiation process," Mims said. "However, more philanthropy growth meant less cost cutting. The budget team sought a balance of realistic growth and sustainable efficiencies in this process."

The financial model included a number of diverse philanthropic income sources: a major gift program (restricted and unrestricted); an event program (unrestricted); royalties from corporate relations; membership from direct response; and planned giving. In 2012, DU also implemented a new comprehensive campaign, "Rescue Our Wetlands," which complemented the organization's strategic plan and was designed to raise approximately $2 billion.

For the strategic-planning process to work, it was critical that the team involved all three functional groups, that leadership invested time with them, that their objectives were simple and quantifiable, and that the team was held accountable to the plan. Board leadership was critical, and both presidents during this plan (John Newman and George Dunklin) and Business Planning Committee chairs (D'Alonzo and Joe Mazon) were vital to guiding DU's staff leadership team toward successful implementation. Not-for-profits perform best when staff and volunteer leadership work in sync.

DU engaged in an incentive program for staff to equally participate in rewards based upon meeting milestones and objectives annually. And everyone shared the same outcome, so either all achieved or no one achieved, creating an additional incentive to work as a team.

OBSTACLES TO THE STRATEGY

Functional areas within a not-for-profit typically have different and potentially conflicting goals. "We called it mud versus money," Mims said. "Program people want more money to spend, but the administrative staff is looking at the need for checks, balances, and organized sustainability."

Creating operating surpluses can be difficult while maintaining fair and appropriate budgets for the organization.

"You can't be too aggressive in areas the organization can't control [such as self-insured medical plans and investment returns]. And a budget should be based on what you expect to happen, not be a wish list," Mims said.

Another challenge to generating operating surpluses overall in the not-for-profit world is that operational surpluses are most often generated from unrestricted revenues.

"To achieve operational surpluses, unrestricted revenues must cover overhead plus, because restricted gifts and government grants usually do not provide resources to cover administrative costs or surpluses," Mims said.

DU's surplus budgeting included new sources of unrestricted revenues. For the organization's major gifts programs, the staff and volunteer leadership had to educate those with whom they had existing relationships, to help them understand that money is needed to cover both program costs and support costs. The organization also encouraged more endowments so that it would receive recurring amounts each year through investment returns. In addition, staff and volunteers created innovative events and raffles to generate a large source of unrestricted revenues. The entire staff team began pulling in the same direction, creating that "Team DU."

GETTING RESULTS

DU's 2012—2016 strategic plan continued to emphasize strengthening the balance sheet and building reserves, which would allow the organization to weather any economic downturns or declines in philanthropy. That plan was successful and made DU fundamentally stronger. In those five years, DU exceeded its acreage goal (conserving 950,000 acres, far more than the goal of 480,000), met its membership goal, and achieved operational surpluses greater than $20 million (double the $10 million goal).

The organization was able to use its improved financial situation to continue to build capabilities and advance conservation goals. About a year ago, DU's board assigned volunteers and staff to discuss what the future should look like, what the organization did well in the prior plan, and what could be improved in the next strategic-planning process.

DU recently approved a new strategic plan for the next eight years, which includes new national business plans for the next two four-year periods. The organization continues to use a surplus budget approach to strengthen its financial position and grow its unrestricted net assets to weather any short-term declines in philanthropy or liquidity issues and to be able to make strategic investments critical to its mission. One of the benefits of the previous plan's financial success is the ability for DU to consider leveraging its asset strength into more mission delivery during the next strategic plan.


Surplus budgeting tips

Bob Mims, CPA, CGMA, a consultant and a member of FASB's Not-for-Profit Advisory Committee, said not-for-profit organizations that wish to implement surplus budgeting can take these steps:

  • Analyze your organization and know your financial situation. Take an inventory of your unrestricted net assets.
  • Educate program, fundraising, and administrative groups about the balance sheet, components of unrestricted net assets, and unrestricted revenues and cash flows.
  • Align every part of the organization, every volunteer, and every staff member around the financial goals, and develop consensus on the budget surplus goal amount.
  • Reduce functional silos so that everyone understands the goals and appreciates that sustainability is needed to achieve the organization's mission.
  • Develop a strategic plan, a business plan, and operating budgets to support the plans.
  • Keep an eye on reserves and have a strategy to "right the ship" at any point.

About the author

Maria L. Murphy (emailmariamurphy@gmail.com) is a freelance writer in Wilmington, N.C.

To comment on this article or to suggest an idea for another article, contact Ken Tysiac, editorial director, at ktysiac@aicpa.org or 919-402-2112.


AICPA resources

Articles

Publication

  • Budgeting, Planning, and Forecasting in Uncertain Times (#PCG1306P, paperback; #PCG1306E, ebook)

CPE self-study

  • Budgeting Considerations: Not-for-Profit Governance and Assurance (#165432, online access)
  • Not-for-Profit Certificate I (#165160, online access)
  • Not-for-Profit Certificate II (#165400, online access)

Conference

  • AICPA Not-for-Profit Industry Conference, June 21—23, National Harbor, Md. (#NOT17)

For more information or to make a purchase or to register, go to aicpastore.com or call the Institute at 888-777-7077.

Online resources

AICPA Not-for-Profit Section, ­aicpa.org/nfp

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