Ten questions to ask before the board approves the budget
Does your board know what questions to ask before it approves the annual budget? While most boards have a vague sense of their need to exercise their fiduciary glands, I’ll bet if you queried your board members, most wouldn’t have a clue what they should be looking at.
Here’s a list to get you started. If you have other questions, we’d love to share them.
1. Does spending align with your program and operational priorities?
If you think of your budget as an investment, are you investing in the right things? What is the return in community results based on your expenditures? Does the budget match your strategic plan? It should.
2. Does the budget honor your commitments to your funders?
First, your donors give to you because you have promised to make the world a better place. Does the budget enable that?
Second, as the Nonprofit Finance Fund tell us, all cash is not fungible in a nonprofit. Board members should know whether dollars that have been restricted by funders are being spent on schedule and for the designated purposes. I’ve seen boards who thought they were okay cash wise blindsided when an audit revealed they were covering general operating out of dollars restricted for other purposes.
3. Does the allocation of the Executive Director’s time reflect Board-approved priorities?
In a full cost accounting system, a proportion of your Executive Director’s time will be apportioned to program, management and fundraising based on the amount of time your Executive Director spends there. So if the budget says that 80% of your Executive Director’s time is in management, is that what you expected?
4. Is the percentage spent on program acceptable, that is, does it meet voluntary standards and funder guidelines? (Follow up question: how many of your board members even know what that percentage is?)
There are no federal standards in the USA (unlike other parts of the world) on how much of your funding should be spent on your programs (though the IRS has been kicking up it’s heels on this issue). But know that charity watchdog organizations like Charity Navigator are tracking this number.
While I happen to think that rankings based on how little you spend on management and fundraising are too simplistic, I also think that it is important that the board pays at least some attention to where the bulk of spending is going.
The standards of the Wise Giving Alliance of the Better Business Bureau are that no less than 65% of your spending should go to programs. If you wish to participate in workplace campaigns such as the Combined Federal Campaign or a state or federation campaign, the standard is 75%. Other funding sources may have different standards.
5. Are you taking in as much or more than you plan to spend?
The equation is pretty simple. Spend more than you bring in and you’ll end up with a deficit. Remember that unspent restricted funds from the prior year still need to be spent on what they were designated for (see above). Not only do you most likely want a balanced budget, you might also want to run a surplus to help build your operating reserve. It’s nice to have adequate cash throughout the year and perhaps even earn a little interest.
6. Are you building cash reserves at a sufficient rate to match your growth?
This follows from the question above. As your budget grows, so should the amount you have in reserve. Accountants tell us that it is prudent to have a minimum of three to six months of operating expenses in reserve.
7. Does spending on salaries and compensation achieve your staffing objectives?
What is your compensation strategy? Does it match your organizational values? Are you trying to attract and keep the most talented staff? Are you providing a living wage to employees at the lowest pay scale? Can you afford to replace employees who leave?
8. Are compensation packages within IRS standards for reasonableness to avoid excess benefit sanctions?
If you have no idea what I’m talking about, run to the IRS web site discussion on excess benefit transactions and intermediate sanctions or ask your auditor for a tutorial. This is a really important issue as individual board members could find themselves personally slapped with steep penalties from the IRS.
9. Are you confident in the probability of projected revenues — enough to approve the requested level of expenditures?
No playing games here. If you don’t have a plan to bring in revenues that allows you to sleep fairly well at night, then don’t pretend that you can fund all those expenses. A good conversation for your board to have is to ask what level of risk you are willing to bet on revenues … and what goes when your best laid plans fail to meet expectations.
10. Are lobbying expenditures within IRS restrictions?
If do any lobbying at all, you should know the IRS limitations on lobbying. Check out the Center for Lobbying in the Public Interest for the full scoop.