It's budget time for the board

Ensuring that the annual operating budget is aligned with the strategic plan was one of my greatest takeaways when I was enduring ‘audit committee weekend’ as part of a corporate director certification program many years ago.

I learned that many of the best questions for management come from non-financial people like me around the board table. Why would that be?

While I believe the audit partners teaching that program module wanted to get the non-financial people excited about being on finance and audit committees, they were also making the key point that today’s era of compliance and regulation causes professional accountants and financial experts on the board to focus on those priorities first.

The question of whether or not sufficient funds had been allocated to strategic priorities was considered to be the kind of intuitive question that a non-financial director might ask. And that lit me up. I had a role and a reason to make an effective contribution.

What are the underlying assumptions informing the new budget? Are we all on the same page?

For many of the boards that I’ve been involved with, the annual budget cycle is relatively straightforward. The CEO or Executive Director has an early discussion with the board chair, then gathers the management team and does the work to produce a draft operating budget.

The heavy lifting takes place when the draft budget is presented to the board’s finance committee for vetting and feedback. It’s also where I can contribute my questions if I’m on that committee. Adjustments are made. The committee then passes a motion recommending the budget be presented to the full board for discussion and approval.

Are we done?

What is the role of a board director who is not on the finance committee and is seeing the budget for the first time? If that’s you, you have the right and the duty to ask questions if you’re curious about anything related to the proposed budget. It’s part of the board’s due diligence. Sometimes the ‘dumb’ question is the one that triggers a valuable discussion.

Granted, the board does delegate its work to the finance committee for oversight of budget preparation. When the budget is presented to the board for approval, it should give all directors comfort that it is aligned with the strategic plan and that the organization’s strategic priorities are funded. And if that’s not the case, then why not?

As a board director, you should be able to read and understand the organization’s financial statements including the annual operating budget. That doesn’t mean you need the same level of financial expertise as a professional accountant. But you do need to understand what someone of your skills and background would be expected to know about the financial matters on the board’s agenda.

Guideline budget questions

Courtesy of our colleague, Mala Sachdeva, CPA-CA, here are a few questions all directors could consider asking when reviewing the annual budget:

1. How do forecast revenue and expenses compare to the current year and the prior year?
2. Have there been any significant events this year, or that you know will be coming up in the next year, and have they been reflected in the budget?
3. Are the assumptions about revenue loss or growth realistic and achievable?
4. Not-for-profits normally budget for break-even, and therefore it’s important to review the veracity of the assumptions underlying the revenue forecasts.
5. Are there any restrictions on grant revenue with respect to how the funds can be used? Is that properly reflected in the budget?
6. What are the key assumptions used to forecast revenue and expenses? How will operating results be impacted next year if these assumptions change?
7. Do the changes in expenses make sense when compared to the current year, prior year, and any planned changes in activity levels next year?
8. Does the budget anticipate any known or expected cost increases? If so, what are they?
9. What portion of the budget expenses are fixed costs (e.g. rent, salaries or administration) versus variable costs (costs that will increase or decrease with service volumes)?
10. Are planned expense increases justified? As a board, do we understand why the expense is increasing and are we comfortable with the increase?
11. Are we budgeting to break-even (revenues equal to expenses)?
12. Or are we budgeting to achieve a surplus (revenue greater than expenses)? What do we plan to do with the surplus if we achieve it?
13. Or are we budgeting for a deficit (operating expenses greater than revenues)?
14. How are we going to cover the operating deficit? (Do we draw on reserves? Or look for additional funding sources next year?
15. Does our budget reflect our business plan and/or key strategic goals for the next year?
    
    

Interim (in-year) reports

Updates will be provided during the year so the board can determine whether the financials are still on track. Sample questions include:

1. How are we doing so far this year compared to budget?
2. How are we doing so far this year compared to the same time last year?
3. Are we on track for our year-end forecast to meet our budget targets this year?
4. If not, what has changed? Has there been a change in assumptions about revenues and expenses compared to when we approved the budget?
5. Do we need to make some in-year adjustments to planned spending to compensate for lower than budgeted revenues or unforeseen expenses?
   
   

Your takeaways:

• While responsibility for the annual budget process rests with management and the board’s finance committee, the accountability for the final result and monitoring throughout the year resides with the full board.
• All directors have a legal duty to pay attention and ask questions during the budget presentation where appropriate.
• No need to ask a question on every item presented!
• Keep the strategic plan top-of-mind by reviewing the budget to see how the plan’s priorities are funded.
• Pay attention during the year to ensure revenue and expense projections are on track. Get ahead of variances early so mid-year adjustments can be made to avoid a deficit or to allocate more funds to support strategic priorities.
• To update your board toolbox, talk to your board chair or governance committee chair about access to director education for boardroom financial essentials training.
  
  

Thank you.

Scott

Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online membership with practical tools for board directors who choose a growth mindset.  

Originally published February 9, 2020

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