The board’s role in approving the budget
The board’s role in approving the budget provides a great teaching tool for the difference between management and governance..
Okay board, what are you really approving?
In the typical organization, your Executive Director with her leadership team have crafted the budget to review with the board of directors. But when the budget gets to the board level, what exactly is the board approving? Is it that $10,000 printing expense? The $6,000 you are spending this year on electricity?
Here’s what a focus on governing would lead you to consider:
Does your spending match your priorities?
Your budget is a reflection of your annual plan. It shows what investments you are making in the organization. Have you decided that you want to grow your education program, yet your advocacy work is eating up all the personnel? Or was this the year you decided you had to deal with your antiquated technology, but there are no dollars included in the budget to support this work.
Can you pay the bills?
This can be determined in many ways. First and foremost, does the income projected for the year cover the expenses you have outlined? Does your income receipt and expense spending schedule cause cash flow problems at various times of year? If you’ve decided to take on a deficit, what is the implication on your financial reserves this year, and into the future?
Are you spending donor restricted dollars as required?
This is a subset of the above. It may look as if you have a lot of revenues coming in this year, but cash is not always fungible in nonprofits. That grant that doesn’t arrive until the third quarter and can only be spent forward could leave you with a deficit in your unrestricted assets. Or your expenses are meeting the promises of those grants. Or are revenues meant for your capital campaign hiding income shortfalls in your operating budget?
How much risk are you accepting in your income projections?
What is the data behind those revenue projections? Is there a well-defined plan based on past experience and carefully projected new revenues? Do you have the capacity to execute the level of effort behind those growth numbers? Or are you carelessly plugging holes with fictional new revenues because you don’t want to cut expenses that really should be cut.
What are the implications of compensation and benefit increases in the budget?
While I’m not one to want to deny staff well-earned pay increases, I also know that when you raise salaries you are fixing personnel at a higher level for years to come. On the flip side, did you budget staff increases but forget to make any provisions for an increase in compensation for your Executive Director or leadership team? Remember to document the level of your ED’s compensation based on market and any other considerations to justify should the IRS inquire.
What’s Plan B?
If you don’t make your revenue projections, when and what do you start cutting? Do you have another solution, say a line of credit? How much debt are you willing to take on?
Are you following your spending policy?
If you’ve got investment income, what is your policy for moving earnings into your operating budget? Are you staying in those guidelines or making an exception? Why? What are the long-term implications of this decision?
Is there anything suspect or unjustified among the line items?
Theft does happen. More than we want to imagine. So a quick check on growth in expenses from one year to the nest should pop out anything that seems highly unusual and may need a second look. If there is a completely new line item, its okay to ask how that was calculated and if other options were considered. And it doesn’t always happen through pilfering, but also in the forms of inexplicable payrolls, unabating troughs in graphs related to finance, etc. It is always a good idea to hire a payroll company like Fort Collins PEO services to make the company immune against these perpetrations.
Do you have a overhead to program spending ratio? Is the budget within that guideline?
Yes, overhead ratios are highly controversial in this sector. Yet for organizations that submit to charity watchdogs or participate in state or federal payroll deduction programs, there are ratios you need to stay within. If you are part of an international federation, there may be nationally mandated limits in other countries that influence your spending ratios. Does a full cost look at your budget meet those guidelines?
What else? What does your board consider when it reviews the budget?