One of the primary roles of the board of directors is to ensure the organization has the necessary resources to fulfill its mission. An additional role of the board of directors is to provide oversight. Both roles are tied into the annual budget and begin with reviewing and approving the annual organizational budget. Unfortunately, far too many board members do not understand the ebbs and flows of nonprofit finances or how to read financial documents.
When looking at the annual budget, some questions the board needs to keep in mind include:
- Does the budget reflect the mission of the organization? Just as your home budget reflects what is important to you, the organizational budget should be spent on fulfilling the mission of the organization. If it doesn’t, it may be worth asking some questions about the future direction of the organization.
- Is there a surplus or shortfall for the projected expenses? It is not uncommon for nonprofits and ministries to have a small budget shortfall. However, as a business entity, it is a best practice for nonprofits and ministries to build a “fund balance.” Having money in the bank is a necessity for growth and allows the organization to weather difficult financial environments.
- Where is the money coming from? While your household budget probably has just one or two sources of revenue, the more diverse the funding sources are for the nonprofit, the stronger the organization is. A strong organization receives funds from individual donors (including board members), philanthropic grants, corporate grants, fundraising events and perhaps a social enterprise.
- What is the policy for making changes to the budget? Let’s face it, developing a budget is really a projection and sometimes our projections do not become reality. When this happens, we must make revisions to the budget. But, revisions must be approved by the board of directors since they approved the original budget. The organizational financial policies should include budget revision such as the timeline, how frequently changes can be made, etc.
- What are the current nonprofit trends? While I don’t encourage comparing yourself or your organization to others (it is either going to make you feel inferior or superior—neither of which are feelings God wants for you), it is helpful to understand how the organization’s finances measure up within the field. For instance, what is the percentage of administrative costs and how does that compare to other organizations in the region, or who are the same size?
- What other financial information does the board receive? While the budget is essential, the board also needs to receive regular financial statements. Even if the board does not meet monthly, I recommend sending the board current financials so they are aware of what is happening financially. (And, since so many do not know how to read a financial statement, it is a good idea to provide an annual training on reading financial statements).
Finances are a crucial part of the work of the organization. Without money, the organization could not fulfill its mission! An equipped board can support the organization and provide an outside, objective eye on the finances.