Creating Excellence in Board Leadership

Friday, April 22, 2011

Budget Oversight Verses Budget Approval

There are 1.9 million non-profit corporations in this country. By law, all are required to have a governing board. As those boards gather to oversee the work of their organization they sense some level of fiduciary responsibility, and more often than not the focus is financial. Virtually every board believes the most responsible thing they can do is “approve” the institution’s annual operating budget, even approving routine expenditures.

Good board governance relinquishes budget approval in favor of shouldering a larger responsibility.

In the context of good governance, the board’s role is not focused on operational or managerial items. Rather, it sets direction (true vision – see blog dated January 12, 2010) for the organization, rigorously monitors progress (see blog dated January 26, 2010) toward vision achievement, and monitors (see blog dates February 18, 2010) financial health and legal compliance so the organization is protected when the board is not in session.

That said; the board’s responsibility with the budget is significantly greater than approval. Consider the following board tasks phrased in the form of questions.

  1. Does management have a 3-5 year strategic plan, with annual initiatives, suitably aligned to board vision?
  2. Has management supplied the board with an annual budget (or financial operating plan) correctly aligned to the strategic plan?
  3. Does the annual budget clearly fund the prioritized initiatives outlined in the strategic plan?
  4. What cash-flow management steps are in place to ensure that strategic initiatives are funded while concurrently protecting against overspending and maintaining necessary cash reserves?
  5. Have key employees been adequately informed of all budget priorities regarding strategic initiatives? Are they knowledgeable enough to supportively communicate those priorities to additional stakeholders?
  6. What financial assumptions (items outside the organization’s control, but directly affect it), if any, are in play and affect the budget positively or negatively?
  7. Is management projecting less-detailed budgets, 1-2 years beyond the current fiscal year, where funding is introduced for future strategic initiatives?

When engaging budgets, governing boards demonstrate fiscal due-diligence differently than boards whose focus is administrative or managerial. Governing boards exhibit rigorous budgetary oversight by devoting themselves keenly to the above process.

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