What a nonprofit’s board should do with a budget

Published in the January 23, 2006 edition of Columbus Business First.

It is the time of year when many nonprofits begin to develop budgets for the following year. Reams of paper will be copied, tables of numbers will stare out defiantly, a few questions will be asked and a budget will be approved by the board.

Some boards will take out a magnifying glass and drill the staff for hours on every line in the budget, from office supply expenses to increases in health-care benefits. Other boards go to the opposite extreme, devoting 15 minutes to a short staff presentation before asking for a vote to approve. 

As with most things in life, the right balance lies in between. That balance is a narrow but intense focus on two decisions;

• Should the organization do anything next year that is different from what it is doing this year? 
• How is the organization going to balance the budget for next year? 

An effective budget process provides to the board only that detail that is relevant to the decisions the board needs to be involved in. The rest is detail the board should leave to the staff.

Unfortunately for most boards, the process, whether it lasts 15 minutes or 15 days, fails to dig deeply into the first decision. I suspect this is because too little thought has been devoted to what a board is supposed to do with a budget.

Budget distractions

Don’t make the mistake of thinking of the budget as just an exercise in adding up expenses and revenue and making sure they balance. 

Imagine the organization is an automobile and the board is the driver. Mission and community need represent the steering wheel, determining the path the organization will take. Finance represents the brake and accelerator pedals, determining how fast the organization travels along that path. The board’s first focus in the budget process should be the steering wheel, that is, how it plans to meet the needs of the community and sustain its mission. 

Strategic planning is the tool most boards use to steer. The budget is useful and relevant only to the extent that it links actions and resources with the strategy and with the change the strategy requires.  The budget process creates that linkage by laying out clearly how, what and when changes will occur over the coming year. 

So the budget is about finances only at the most superficial level. The budget is mostly a decision concerning how staff will spend their time, how well the organization can absorb change and how successfully the organization believes it can modify some ongoing activities in order to accommodate new ones. 

Most budget detail is not germane to these decisions. At the staff level, there are myriad details that must be examined, but such details can distract the board from its strategic focus.   

The technique and complexity of the approach to budget building is less important than the objective of building a budget: To identify priorities and have an affordable plan of action that the board can follow over a 12-month period that will achieve those priorities by the end of the budget year. The ideal budget process from a board perspective is one that keeps the board’s focus on strategic decisions.

Strategic view

In working with my clients I have found that this is most effectively accomplished by utilizing an approach that I call continuation and initiative budgeting. This approach separates information on continuing, unchanging activities from information on the special efforts that are being proposed to advance or modify delivery of the mission. 

This approach can allow the board to focus on whether it wishes to advance or modify the mission and whether the special efforts are financially or programmatically desirable.

Board deliberation on the budget should focus almost entirely on the initiatives, on whether to run a surplus or a deficit or to be exactly in balance, and on the method to finance the deficit or set aside the surplus. These board deliberations may conclude that the number or size of the initiatives needs to be adjusted, reserves need to be modified, a few ongoing activities need to be scaled back, some ongoing revenue needs to be expanded, or any variation on the above.

The board’s greatest value is its strategic perspective from 10,000 feet up. The appeal of the continuation and initiative approach to budgeting is that it makes it much easier for the board to apply its strategic perspective to reviewing a budget. 

If a board has a good sense of its mission, goals and priorities, this approach is worth testing for the next budget round.

Allen J. Proctor was chief financial officer of Harvard University and is the author of “Linking Mission to Money, Finance for Nonprofit Board Members.” Reach him at  www.proctorconsulting.org.

Copyright 2006. Reprinted with permission, Business First of Columbus Inc.