So normally, high level you look at what your activity was last year and you adjust that based on what you think is coming in the next year taking into consideration your contracts and other outside information.
You do the same with your expenses and look at what the activity is expected to be and you multiply that by your wages and overhead and add in your salaried employees and your other fixed and variable costs and tie it all together and you have a budget.
The problem this year is the unknown and the assumptions you make. I have spent a chunk of today trying to find what other kinds of organizations are looking at in terms of hits in their activity. I cannot find anything that is a direct parallel to our situation. Universities are game planning for this to hit their bottom line through 2022. Some public health people are saying that we are looking at optimistically a vaccine at the end of 2021. The Federal response has a lot to be asked for in terms of both health and economically. Economists range from a roaring recovery this fall and winter as pent up demand to a pessimistic slow growth back to where we were in January, made harder because of so much capacity loss in the service sector – loss exacerbated the longer we have this semi-shutdown situation.
There is no consensus, but we need to make realistic assumptions about our income and expenses. Because often the budget comes down to those two numbers and the difference between them. We end up with many estimates under uncertainty coming up with a bottom line. Often an error in one estimate is not additive, it is washed by an error of similar magnitude but an opposite sign so we can get pretty close to realty – it is pretty amazing in a normal year.
Unfortunately, it is not a normal year. Thus, there are two sorts of things in my head as we think on budgeting:
1) Baseline and projection: The lookback for what the future looks like cannot really be annualizing the last financials’ income and expense. We have the time period through February, and then March and April and not even done with April numbers. I hope to have some preliminary numbers through April as soon as possible. Then once we have our baseline there is more unknown about when we return to anything like “Normal” if we do at all. Which leads me to the next part.
2) Strategic concerns: How do you look at this crisis as an organization? Is it just as many people go home as possible and work from home for as long as we need to? Do we imagine this is just a pause from what the prior life was? Alternatively, does the crisis accelerate operational concerns we were worried about before. Are programs and business lines impacted disparately? Then we have to think that if activity is down, the overhead is supported by fewer hours. The longer this lasts the less sense it makes to support all the fixed costs from positions to real estate that is empty. None of these are fun considerations but ultimately important for the long-term success of the agency. How proactive are we strategically, and do we tie that into the budget?
These concerns on the short term are always present since the future is always unknowable; it is just even more in flux now. What it makes me think about is the futility of budgeting in a normal time. Those errors I spoke of above always exist. The hope is that they do wash and are not additive. For me, this is a conflict between two strains of my thinking. The idea of point estimates, looking at income and expenses and their difference is an accounting view. However, thinking of economics I would put measure of uncertainty around your final numbers. You might budget a gain or loss but have error bands. Unfortunately, that is not how it is done. This is not a problem unless your budget is used as a constraint and is not flexible, but that is a concern for later.
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