User:Simonpfister

Conditional Budgeting
make sure income is one step ahead of expenses!

Conditional Budgeting is a Budgeting approach developed by Simon Pfister, designed for companies with fluctuating income, high fixed costs, or income depending on sunk costs, as well as NPOs and NGOs.

The core idea of conditional budgeting is to structure income and expenditures according to probabilities and priorities respectively. After the budget is approved, the actual status of the finances is reviewed and analyzed regularly, and if income reaches a certain level (or probability), the corresponding level of expenses is approved.

Therefore conditional budgeting does not allow spending a certain predefined amount of money or consuming certain resources, it rather defines priorities of expenses and resources as well as income and earning levels that will allow releasing the funds for expenses and resource consumption.

Conditional budgeting derives many ideas from multiple budgeting approaches (see below), however, it is unique in the way it combines budgeting and analysis of current status, and then releases expenses. The budget becomes a process for everyone to agree on income probability and expense priority. It does no longer define a certain level of expenses, it rather a process for an organization to agree at what income and earning level to release what amount of expenses and resources.

The budgeting approaches that served as foundation include traditional budgeting, zero-based budgeting, better budgeting and beyond budgeting. While building on the strengths of these approaches, conditional budgeting avoids the disadvantages of these approaches for organizations or in times of unstable income streams. The two main benefits are:

(1) Expenses are budgeted according to priority level and in correlation with income and cash flow. In the effective year, expenses are only released based on the corresponding positive income and cash situation.

(2) During the effective year, the ongoing analysis does not explain deviations, the analysis rather focuses on defining the appropriate point in time when to release the conditionally pre-agreed expenses.

Conditional Budgeting has been used successfully at Foundation Green Ethiopia, an NGO supporting agriculture and afforestation projects in rural Ethiopia. Any project expenses are clearly tight to respective income. Conditional Budgeting has allowed the organization to successfully implement projects to the benefit of rural farmers in Ethiopia, and it has allowed the organization to smoothly grow 5-fold within 10 years without adding more complexity to the budgeting and financial performance measurement. Instead, the resources have been used for conducting projects, manage operational performance, and therewith focus on income and growth instead of managing costs and expenses.