Nonprofit Budgeting: Key Board Roles and Responsibilities and Questions to Ask Prior to Approval

By Hope Goldstein  |  May 29, 2018

The roles different people play in the budgeting process generally depend on the nonprofit’s size, structure, revenue sources and expenditure expectations. While there are several models for budgeting including the roles and responsibilities for all involved, best practices would suggest that first and foremost, process and procedures be spelled out in a written document and kept up to date and understood by all those involved. In addition, it would be a welcomed antidote if the organization conducted an annual orientation and training session for the budget prep team to carefully walk through the entire budget process. This will refresh the memories of veteran budget team members and orient new team members.

So what are the defined roles and responsibilities between Board members and staff? Simply stated - creating the annual budget is initially staff’s responsibility, but Board members (usually those on the Finance Committee and/or Executive Committee) often review the proposed budget, and the full Board usually adopts the budget at a full Board meeting. The approved budget then serves as a guide for financial activity in the months ahead. Budgets should not be “written in stone” because the financial position of the nonprofit may change during the year.

THE BOARD’S ROLE

Overall, the Board is legally responsible for ensuring that the budget meets applicable laws and regulations, are fiscally sound and will further the nonprofit’s tax-exempt purpose. Generally it means:

1. Establishing general budget policies, such as:

• Requirements for a balanced budget
• Policies on the use of cash reserves
• Decisions about salary increases, new programs, capital projects, and major fundraising efforts or capital campaigns, among others
• Decisions concerning the need for a zero-based budgeting analysis for one or more programs or activities (see sidebar below for an overview of Zero-Based Budgeting*)

2. Formally reviewing and approving the budget

3. Regularly reviewing financial and narrative reports on budget implementation and planning for any needed corrective action

• A standard tool used to help Board members is a financial report that presents each line item in a budget versus actual results to date. Read more: Four Components of Meaningful Internal Financial Statements for Nonprofits.

THE BOARD’S REVIEW AND APPROVAL OF THE BUDGET IS ONE OF ITS CRITICAL RESPONSIBILITIES, BUT WHAT REALLY IS THE BOARD APPROVING?

It’s the Executive Director or Chief Executive Officer along with their leadership team who have built the budget, but should the Board review every line item in the budget, and is that really their role? The answer is obvious: using a Board member at that level probably is not the best use of their talents. Instead, as Board members, the governance responsibilities, as they relate to the budget review and approval process, should focus on answering the simple question: Does the spending match the organization’s priorities?

An organization’s budget has to be a reflection of the annual plan; it needs to show what investments will be made in the entity. If decisions have been made to grow a specific program, have dollars been allocated as such? If it’s the organization’s priority to invest in technology, but budgeted expenses seem to be in line with last year’s budget, then maybe the budget needs to be revised to reflect the true picture.

ADDITIONAL MEANINGFUL THOUGHTS BOARD MEMBERS SHOULD FOCUS ON WHEN REVIEWING & APPROVING A NONPROFIT BUDGET INCLUDE, BUT ARE NOT LIMITED TO:

1. Does the budget honor commitments to our donors/funders? – Remember, cash is not fungible in a nonprofit. Board members should know whether dollars that have been restricted for purpose or by time are in compliance with those restrictions. As a Board member at a nonprofit many years ago, I was very surprised at year end, when we were reviewing the audited financials, that the organization was cash poor as a result of covering operating costs using restricted dollars.
2. What do we know about the functional allocation of the budget’s expenses? – This is a whole other topic, but in short, Boards need to ask: are the allocation of the budgeted expenses in line with what charity watchdog organizations like Charity Navigator look for when rating a nonprofit on its spending relative to its programs and supporting services? Although there are different ideologies on this topic, it is important that the Board pays attention to where the bulk of spending is being budgeted.
3. Are we approving a balanced budget? – We all know that if we spend more than we raise then we end up in a deficit position and so, if a surplus is not likely, a balanced budget is what a nonprofit organization should strive for.
4. Does our budget consider saving for a rainy day? – If the organization’s budget grows, so should the amount it has in cash reserves. What that cash reserve should be is part of the organization’s strategic plan and is based on its risk tolerance. Best practices suggest that it’s prudent to have a minimum of three to six months of operating expenses reserved.
5. Are budgeted salaries and compensation in line with the staffing strategy? – Any organization wants to maintain and obtain the most talented staff. Does the budget take into account being in a position to ensure that the organization is maintaining that talent and can afford to replace employees who may decide to leave?
6. How confident are we that the budgeted revenues will be met? - Remember, the budgeted expenses are derived from what the organization expects to receive in funding from private donations, government funding or earned revenue. The budget has to be realistic, especially to meet the entity’s budgeted expenses. Boards need to ask the question: if funds aren’t received what is Plan B?

Approval of the annual budget is one of the fundamental building blocks of sound financial management for any nonprofit organization. The approved budget will not only guide the organization’s future spending, but also serve as a tool to assess its financial health at any given time throughout the year. Asking the right questions and focusing on these key areas of concern will help the Board review the budget more efficiently and approve a version that sets the organization up for a productive and well-managed financial year.

 

* During the budget process, organizations assume that budget items are already set in place and that past history of program income and expenses do not need to be reanalyzed. It assumes that the activity being budgeted is necessary and that the manner in which the activity is being conducted is the best way to get the job done. However, in zero-based budgeting, everything that is to be budgeted needs to be justified; not only costs, but also the effectiveness of the program’s goals. Since zero-based budgeting ignores the prior year’s budget, a new budget is being built item-by-item, from the ground up. This means that budgets are started from a zero-base, with a fresh decision on everything being made every year.

 

 

 

About Hope Goldstein