By Regenia Bailey / Guest Editorial
This is the time of year when many nonprofit boards develop their annual budgets. Managing an organization’s financial resources is a fundamental board responsibility and creating a budget is a part of this work.
Unfortunately, many boards spend little time on this task, often relegating the bulk of the work to the finance committee or to staff. This approach can create a disconnect in board members’ minds between the budget and the work of the organization. By integrating budget development with discussions about the organization’s strategy, a board can create a tighter connection between the work of the organization — its programs, its strategic priorities and its fundraising — and the means — the organization’s financial, human and technological resources — by which the work is done.
Connect budget to strategic plan
The budget should reflect the organization’s strategic priorities. If the organization’s plan calls for the creation or expansion of a program or service, this should be reflected in the annual budget. In many ways, one can think of the organization’s budget as its strategic plan described in numbers instead of words. If there isn’t a connection between an organization’s plan and its budget, the organization’s strategic initiatives will suffer, and likely fail, because the board has not prioritized these activities and provided the means with which to pursue them.
Connect budget to fundraising plan
Many organizations develop an expense-based budget, itemizing the costs of what it takes to do the work, and simply plugging-in a number for the revenue side of the budget equation. Without a corresponding fundraising plan to provide details about the revenue sources, the organization will struggle to cover its financial obligations. If the board and staff cannot develop a plausible fundraising plan to support the organization’s work, it may need to examine the budget’s feasibility. Once again, the budget must be connected to the activities of the organization, both on the expense side as well as the revenue side. In this case, the numbers require further explanation through the narrative of a fundraising plan if the board is to be successful in providing the resources to do the work of the organization.
Often, the format of an organization’s budget does not correspond to the format of its monthly financial reports. This can make it difficult for the board to track the organization’s financial health throughout the year. The budget is the annual financial plan for the organization; the monthly financial statements enable board members to monitor the progress on this plan. Ideally, the regular financial statements should provide a budget to actual comparison. This allows board members to see if the organization is on-track or not, and to respond accordingly. Board members shouldn’t have to shuffle between a copy of the budget and monthly financial statements to answer the question, “Are we on-track with our financial goals?”
Design a process that works
The board may want to develop a longer budget approval process — for example, presenting the budget at the meeting before it is to be approved — to provide time for more thorough budget discussions. This can help members understand the budget’s connection to the organization’s activities, and provide an opportunity for them to offer ideas based upon their areas of expertise and experience.
The development committee and the finance committee should work together early in the budget process, and ideally present the organization’s proposed fundraising plan along with the proposed budget. Some boards may want to include their annual goals as part of the budget document and draw attention to their corresponding budget line items. Whatever the specifics, an organization’s budget development process should help the board link the budget to the organization’s strategic priorities; provide time to develop good detail on both the expense and the revenue sides of the budget, and lay the groundwork for the board to easily monitor the organization’s financial health so it is able to respond when necessary.
Careful development of an organization’s budget and attention to the budget development process helps create a more informed board and a stronger organization.
Regenia Bailey is a consultant and coach to nonprofits and small businesses at her firm, the Bailey Leadership Initiative. She is a former mayor of Iowa City and teaches business courses at Kirkwood Community College. For more information, visit www.baileyleadershipinitiative.com.