Welcome Remarks

The Budget Assistant: Budget Formulation and Improving Forecast Accuracy
By Michael J. Castrilli

Effective budgeting is critical for providing resources to priorities and for achieving program objectives and goals. “The Budget Assistant” is a series of articles on best practices related to budget process, formulation, execution, and control.  In the first article, we focused on practical techniques to develop an open, collaborative, and transparent budget process. Now that the budget process is established, this article will discuss the next phase of budget formulation and will compare and contrast the methods of top-down and bottom-up (or zero-based budgeting) for application within your organization. To help you gain insight on where to focus your efforts to improve forecast accuracy, we will also construct an easy-to-use variance report. This report will provide a snapshot to help you visualize the differences between your budget and the actual expenditures for a given category.

Budget formulation is the process organizations use to develop resource planning estimates for income and spending categories for a given time period. For Church organizations, budget formulation can span a few months or a few weeks. Formulation can also occur on multiple levels. For example, as the Diocese prepares the overall Diocesan budget, parishes within that Diocese also undergo their own budget formulation processes to compile the data and information needed for their operating and capital budget submissions to the Pastor, Finance Council, and the community at large. 

In the previous article, we established that the budget is a tool to help manage and ultimately achieve the priorities for the organization. Now think about developing a budget as building a house. In order to complete the house, you need to lay the foundation, put the walls in place, and install the roof before you can start decorating. Like building a house, the architecture plans are established when you develop your budget process. The foundation and walls may already be established (Archdiocesan/Diocesan policies), and you may already be aware of what it will take to bring the house up to code (Canon Law). You are ready now for budget formulation, which is the process of performing the detailed work of putting in new floors, painting walls, and buying appliances.

There are multiple methods to develop a budget. Since we are now going to forecast resources that we expect to come in (income) and spend (expenses), there is always going to be a level of uncertainty no matter how we approach the topic. Webster’s Dictionary defines forecasting as “calculating or predicting (some future event or condition) usually as a result of study and analysis of available pertinent data.” Whenever we predict anything it involves our best estimate, or guesstimate, of what will happen. The good news is that we typically have some level of information or data that can help guide us, but that is not all. We also have people around us who have experience and can help provide their insights on what they believe will happen.  If you feel like you have not been 100 percent accurate in forecasting at your organization, remind yourself of the age-old adage that “perfect is the enemy of the good.” Instead, aim for 95 percent accurate, and remember that forecasting improves over time and with experience.

To determine the overall methods we will use to develop estimates, it is important to begin with understanding at a high-level two approaches to budgeting, top-down and bottom-up budget formulation. Whether the budgets are either method or a hybrid, there are inherent advantages and disadvantages to each method, and understanding these approaches can help you determine how you might put these in place at your organization.

Top-Down Budgeting

A top-down approach to budgeting is when resources are allocated at a high-level and the details are worked out based on this amount of funding. To use a simple example, think about your salary. Each month, your employer gives you a salary, but does not dictate how you spend that money. Unless a pay raise is on the horizon, you know how much money you have available to spend, and you work out your budget based on that amount of money. The same method applies to organizations. At certain organizations, a leader will establish the allocation of monies for a given project and then create a budget from that level of funding. On the other hand, maybe you receive a donation from a benefactor, and you are going to budget those resources using this method. 

The advantage of top-down budgeting is that the method is relatively simple. It does not necessarily require labor-intensive cost estimating because the overall amount of money that will be budgeted is already established. Using this method, money is then allocated to categories of spending. One disadvantage to top-down budgeting is that you may be forcing or form fitting various cost elements to meet your target. For example, if you are using the top-down budgeting method, you may decide in the next fiscal year that you would like to spend $8,500 on a faith formation program. The director of faith formation may then be expected to divide the funding into established categories. Table 1 is an illustrative example of how the director might divide the budget he/she has been given. 

Table 1: Top-Down Sample

In this particular example, it is best practice that the director is involved in determining a plan for the money to be spent. A disadvantage to this budgeting method is that the director may feel as if this budget has been forced upon him/her. Note this may also cause challenges related to future budget execution and control (more on this in the third article). If a top-down method is applied to an organization without the collaboration of those responsible for managing the budget, ownership by the director for meeting spending goals may not be as strong. As an example, if the parish treasurer notices that spending is high for publicity at midyear, the director may say, “Well, I was given a budget and I made it work.” 

Top-down budgeting can work well when you know the amount of money you are willing to allocate or you have a set amount of funding provided by an external source. The key is to involve and empower others who will help you manage the budget early on. As a general rule, if the top-down method is applied to budget formulation, it is important for those who are given responsibility for managing the budget to propose and justify enhancements or reductions for the budget they have been allocated. A simple method involves asking the director to detail how he/she plans to spend the money AND allowing him/her an opportunity to propose changes to the amount allocated. You may now be thinking, “Ok, but staff will always seek more resources, right?” Again, this is why collaboration is so critical in budget matters. When staff members are empowered and know they have input into budget formulation, it is much less likely unreasonable requests are proposed.  Budgets developed secretly or through closed-door methods serve no one well and actually diminish staff morale. Therefore, top-down budgeting works well when those who manage the budget are involved in the process.   

Bottom-Up Budgeting or Zero-Based Budgeting (ZBB)

The other formulation method is a bottom-up approach, which is sometimes referred to as zero-based budgeting (ZBB). This method involves building a budget from the lowest income/expense elements and then rolling them up into the total budget request. Some professionals will use the method of ZBB, which has the budget of a particular program built from zero dollars. From zero, each cost element is developed and justified; therefore, when the budget is complete, the manager or leader has a thorough understanding of the activity under their management. The advantage to this type of budgeting is that one can scrutinize and justify each cost element in order to develop the budget. The challenge is that it can be time consuming due to the comprehensive nature of building up from zero. Therefore, if using a ZBB approach, the leader may only consider this method for one department at a time or take the ZBB approach every other year, so that the process is not overwhelming for those involved in building the budget. When developing a budget using the bottom-up approach or ZBB methods, the insight into a program/department is typically very good. 

Continuing with our faith formation example above, if the Parish was using a bottom-up approach to budgeting, the director of faith formation may be tasked with building the budget from the lowest level and developing estimates per category, which roll up to the larger budget request. Below is a sample for how this may look when preparing the budget for a faith formation program.

Table 2:  Faith Formation Program Sample – Bottom-Up Approach

As noted previously, budgeting is about helping to achieve your priorities. A key advantage to involving others in the formulation phase is that the staff you involve will then have additional insight into their program’s funding and will be able to help meet their program goals. As you can see from the sample budget in Table 2, one key advantage to developing a budget using the bottom-up approach is that both the director and the Pastor understand what is included and what is not included. If you are the leader responsible for approving the budget, even though you may find that the director’s proposal is too high or low, it is easier for both the Pastor and the director to decide where and what to reduce or enhance because the work for an effective budget is available. This also empowers the director to have broader buy-in. The director then manages an approved budget that she/he creates and understands.

Let’s develop a realistic example to further my point that collaboration creates efficiency in budgeting. Consider this: when inevitable budget reductions are necessary, if the budget is prepared well, both the Pastor and the director understand the constraints and flexibility that exist within their budget. For example, if the director must cut the budget by five percent ($341), it is easier to look at the budget in Table 2 and make reductions. The director may propose 500 copies per event (saving $75) and decide not to have food at one event (saving $500). The director has now proposed a total savings of $575 and a budget reduction of 8.4 percent. Think about how many leaders would love to have staff propose additional savings because they have better information! When staff have the information to make strategic budget recommendations, all parties benefit. Even though we are working with a simple example in this article, think of the magnitude of this type of decision making when it comes to larger, more complex budgets.

Now that we have established the high-level approaches to budget formulation, ask yourself the question, “How accurate were your budget estimates for a given period last year?”  The answer to this question will help you focus on those areas in your budget that you are estimating well and other places you may need additional help.

Variance Reporting to Improving Budget Forecasts

A simple variance analysis can help answer this question. By using a spreadsheet program, you can calculate the variance between actual and budgeted amounts for a given time period. The period could be a year, a quarter, or six months, but the key is that you have data available.  Table 3 provides a sample of how you may set this up for your organization and includes the data and formulas you will need. 

Column A is the category of spending you would like to analyze. Column B is the total amount of money you spent for a given period. Column C is the amount of money you budgeted for this category. Column D is the amount of money you spent subtracted from the budgeted amount. Column E calculates the percentage over- or under-spent given the budget you created for a given category (in Column E, multiplying times 100 makes the percentage easy to read).

Table 3: Sample Variance Calculations

Now that this spreadsheet is created, take a few spending categories and calculate the variance that exists between what you thought you would spend and what you actually spent. For example, a Church may take expense categories like office and technology, utilities, and liturgical and sacramental spending and place them in Column A. Then, take a prior year period where you have data available and place the actual amount of money spent in Column B and the amount you budgeted in Column C. Finally, utilize the calculations in Columns D and E to report the variance.

Table 4: Sample Variance Report for Church

Table 4 provides a quick snapshot of the variance between actual spending and how much was budgeted by category. Does this mean that next year you need to reduce the estimate for sacramental spending because you spent ten percent less than you budgeted?  Alternatively, should you increase the budget for office and technology because you were six percent over budget?  The short answer is, “it depends; you need more information!” Maybe utilities was under budget this past year because we had a mild winter and summer. The key to a variance report is to help you narrow in on those categories where you may need to seek further information. 

The variance snapshot provides a quick and easy-to-use method to give you insight as you formulate (and later control and execute) your budget. If you are a leader and not heavily involved in understanding the budget, this is a great method to validate your organizational spending. Maybe you are new to the organization and have financial responsibility. As a first step, ask to see this type of report for all categories of spending for a prior year.     

There is so much more we need to discuss, but this is a good point to stop – for now! The good news is that we have time in the next article to go further with this topic. Here is your homework.  Before you read the next article in this series, think about the ways in which your organization currently formulates the budget. Do you use a top-down technique, bottom up, or a hybrid? Does the method allow for collaboration across your staff? Are those responsible for managing budgets part of the budget formulation? Be sure to take some time to develop a quick variance report. Are there some categories of spending you would like to analyze? Utilizing the formulas in Table 3, calculate the variance between budgeted and actual amounts of funding. I recognize there are many assumptions, caveats, etc., but just try it, and in the next article, we will continue with the best ways to use variance reporting to improve forecast accuracy and help you manage spending throughout the year. Until next time, happy holidays!

Questions or comments?  Feel free to email Michael Castrilli at mjcastrilli@gmail.com

Michael J. Castrilli

Michael Castrilli  is  a senior client decision manager at Decision Lens, a software company based in Arlington, Virginia. Prior to joining Decision Lens, he was the treasurer of DeSales Hall Seminary in Washington, D.C. as a scholastic with the Oblates of St. Francis de Sales. Before entering seminary, Michael was a management consultant with Booz Allen Hamilton and the Corporate Executive Board.

Legal Issues for Parishes: Negligence
By Charles Zech, PhD

It is no secret that we live in a litigious society. Every organization, including parishes, must be vigilant to ensure it has done everything in its power to protect itself against potential lawsuits. While no one expects parish staff to be legal experts, understanding some basic legal concepts can be invaluable in avoiding situations that could result in some liability for the parish.

Sr. Mary Angela Shaughnessy, SCN, JD, PhD has written extensively on church legal issues. In The Parish Management Handbook, she wrote the chapter “Parish Administration and Civil Law” , in which she discussed a variety of legal issues parishes could potentially face. Among them is negligence.

According to Sr. Mary Angela, most parish administrators lack a basic understanding of negligence and, as a result, are more frequently sued for negligence than for any other issue.

Sr. Mary Angela defines negligence as “a violation of a duty that proximately causes an injury.” Negligence can be the result of acts of either commission or omission. An individual either did something that should not have been done or neglected to do something that should have been done.

Courts recognize four components in a situation in order for a legal claim of negligence to be made. First, the individual accused of negligence must have had a duty in the situation. Parish personnel, both paid and volunteer, can be held responsible for injuries that occur in a situation where they have responsibility. Sr. Mary Angela gives cites an example of a court case where a school principal was found to be negligent in a case where a student had been injured after arriving at school in the morning before the school doors were open. The court ruled that because the principal was in his office at the time, was aware that students regularly arrived before the school doors were opened, and had failed to establish rules for student conduct in this situation and to arrange for the supervision of the students, he had a reasonable duty in that situation.

A second factor of negligence is violation of duty.. If someone has a duty, but has not violated that duty, that person cannot be considered to be negligent.

The third element is that the violation of duty must have been the proximate cause of the injury. The question becomes, would the injury have occurred even if the duty had not been violated? If so, there is no legal basis for negligence. The plaintiff must demonstrate that the injury was a direct cause of the violation of duty. One important aspect of proximate cause is the issue of “foreseeability.” It is only necessary for a plaintiff to prove that a reasonable person would have foreseen the injury. It needs to be emphasized to both paid staff and volunteers that it is necessary for them to be foreseerers of potential risks.

The final component for a finding of negligence is injury. If there is no injury, there can be no legal negligence, no matter how irresponsible a person may have acted.

According to Sr. Mary Angela, the bottom line for parishes in developing and implementing policies is to focus on a “reasonable standard” and to ask themselves, “Is this what one would expect a reasonable person to do?” It is impossible to anticipate every contingency, but reasonable people can identify potentially dangerous situations.

Sr. Mary Angela concludes this section of her chapter with four recommendations for parish administrators:

1. In hiring both staff and volunteers, utilize procedures that include a thorough background investigation and an assessment of fitness for the position. Is the person capable of providing the appropriate level of supervision? Just because an individual wants a position does not necessarily mean they are both mentally and physically qualified. It is difficult to turn someone down for a position in a parish setting, but it is less hassle than an expensive lawsuit.
2. Ensure that personnel and volunteer handbooks are up to date with clear policies and procedures for supervision. This is especially critical when the supervision involves young children, where courts typically apply a higher standard.
3. Conduct a safety audit at least once every year. Inspect all buildings and the grounds, identify areas of danger and develop plans to address them. Many parishes have established a buildings and grounds committee for ongoing oversight.
4. Establish a crisis plan. Plans should be developed when they are not needed so that they will be in place when they are needed.

To learn more about issues concerning negligence as well as other civil law issues that impact parishes, see the chapter by Sr. Mary Angela Shaughnessy, SCN, “Parish Administration and Civil Law” in The Parish Management Handbook, Mystic CT: Twenty-Third Publications, 2003.

And The Survey Says…
By Charles Zech, PhD

How has your parish weathered the “Great Recession”? A recently released 2010 survey conducted by the Cooperative Congregations Studies Partnership (CCSP), a multi-faith group of religious researchers and faith leaders representing over 25 faith groups, had some interesting findings in that regard. The survey included data from a national sample of 390 Catholic parishes. The average annual budget of the parishes in the sample was $566,564. They spent about 39 percent of their budget on salaries and benefits, 26 percent on buildings and operations, 13 percent on program support (such as religious education or youth groups), 12 percent on mission and charity (including diocesan assessments) and 10 percent on other expenditures. The CCSP found that among the Catholic parishes in their sample:

• 39.7 percent thought that their parish’s financial health was in good or excellent condition in 2010, while 42.9 percent believed that to have been the case for their parish in 2005.
• 56.8 percent indicated that their income had declined during the recession; 19.6 percent found no significant change; 13.2 percent of the parishes in the sample saw income decrease at first and then rebound; and 10.5 percent realized an increase in parish income during the recession.
• The following areas in the parish budget have felt an impact due to the recession:
  • 21.9 percent of the parishes resorted to layoffs or furloughs
  • 51.8 percent experienced staff salary reductions or freezes
  • 29.2 percent delayed filling staff positions
  • 61.8 percent realized an impact on their investment and saving income
  • 55.2 percent found their funding for mission and charity affected
  • 52.5 percent indicated that a building program or capital campaign had been impacted
• Parishes have been called upon to do more for their parishioners:
  • 64.6 percent indicated that the recession resulted in more requests for pastoral counseling
  • 85 percent felt the impact of the recession in the form of increased requests for cash assistance
  • 62 percent received requests for emergency housing due to the recession
  • 92.3 percent felt the impact through additional unemployment among their parishioners

What was your parish’s experience with each of these issues? Were you better off or worse off than the parishes in the CCSP sample? Let us know at CSCM@villanova.edu