An excerpt from Linking Mission to Money.
Chapter 16 pp. 69-70 "Cutting Back Strategically"

I have talked a good deal about what you should do during the good times so you will have some resiliency during the tough times. The reality is that, no matter how well your board has prepared for the tough times, you will never get it just right. During difficult times, spending will likely still need to be cut no matter how well you have planned. Your planning isn't without value, however! You can be certain that the cuts would have had to be much, much worse if you hadn't drawn in on the reins in the previous years.
SUSTAINABILITY OF MISSION IS YOUR DECISION-MAKING CRUCIBLE

When you do have to talk about spending reductions during tough times, you still must keep sustainability of services as your goal. It is critical that the budget cutting process be strongly focused on mission: spending that fosters mission should be preserved as much as possible and spending for secondary purposes should be cut first. This budget cutting effort is best supported if the board has established clear policies and has built its budget based on mission delivery.

Be wary of the easy path of arbitrary cuts: freezing or reducing salaries, canceling travel and publications, deferring maintenance, and reducing service levels are not mission-focused criteria. While cuts in these areas are probably going to have to be made, make sure you know the implications of such cuts on your ability to sustain services during the tough times without prolonged adverse effects when times improve. The problem with the easy cuts is that they certainly play well to the newspapers but they may not necessarily be the appropriate cuts to best sustain your mission. A board is not likely to be publicly criticized if it cancels travel and training, reduces hours or services, and freezes staff salaries, regardless of the harm they may do to the long term sustainability of mission. But your job as a board is to sustain the mission. If your decisions on what to cut and what not to cut are justified based on mission, you will have done the right thing and you should not worry about the headlines.

When times are tough, it is difficult to know how much you may need to cut back because the target seems to keep moving. No slide begins overnight, nor does it have a clear ending and beginning. Your biggest danger is that you will be behind the curve and continue to make short-term budget decisions that in hindsight may not be the right decisions. Looking at monthly shortfalls from budget is a guaranteed way to stay behind the curve. It ensures you will continue to play catch up and continue to be surprised.

The best way to solve a problem is to look ahead to evaluate the extent of the problem. Ideally you will have a multi-year financial plan which you can use to evaluate how long and how deep the problem is and how effective and long lasting some of your solutions may be. If you don't have such a plan developed yet, at a minimum you should require your staff to project the year-end revenue and expense levels, including year-end cash balances, loan balances, and reserve levels. They may have concerns about the accuracy of their estimates. Don't be so concerned about accuracy: any estimate is better than none because it compels you to ask the right questions without a debilitating and distorting crisis atmosphere. This look ahead approach (as opposed to waiting for monthly or quarterly budget reports to show problems after they have occurred) allows the board to have time to deliberate, avoid rash actions, and take actions early enough for meaningful spending savings to develop.

A look ahead approach works best if you have fostered a board culture of supportive inquiry and openness as we discussed in the first conversation and we will return to it in the last. A visible eagerness of the board to know of problems early on will enhance the ability of the organization to act before problems become crises. Creating a culture in which messengers are not punished is critical to a healthy, sustainable organization. I benefited a great deal early in my career as a budget forecaster when my boss said, "I will never fire you for telling me about a problem, but I will fire you if you don't tell me about a problem." What a favor he did for me. You should do the same favor for your staff, and be sure you stick by that promise!