Should the Board Be Involved in Setting the Annual Budget?

Welcome back to Ask a Nonprofit Expert, NPQ’s advice column for nonprofit readers, by civic leaders who have built thriving, equitable organizations.

As always, this series offers Leading Edge members the opportunity to submit tough challenges anonymously and get personalized advice. In this column, we’ll publish answers to common questions to strengthen our entire community’s capacity.

In today’s issue, Jan Masaoka returns to answer a reader’s question about the board’s involvement in setting the annual budget.

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Dear Ask a Nonprofit Expert,

I would like to know if a board should be involved in setting the annual budget for a small- to medium-sized nonprofit?

Sincerely,

Straight-to-the-point Reader

Straight-to-the-point Reader,  

The short answer is yes—for organizations of all sizes. That said, I urge you to consider this question: “Should two people who live together both be involved with the housework?”

Although the answer should be unequivocally “yes,” it also depends on the abilities and contributions of each person. And that might change over time as one person perhaps loses their job, or one develops a disability, or one has an especially tough month at work.

Legally responsible for financial oversight of the nonprofit, the board should review the budget and be confident that it reflects the organization’s priorities of the moment. Maybe it can’t afford to lose a lot of money for another year, or maybe it’s time to spend some reserves (which would show as a budget anticipating a deficit). Maybe there’s a commitment to raise salaries that needs to be reflected in the budget. The board should ask questions to feel confident that the staff has thought through the projections.

Legally responsible for financial oversight of the nonprofit, the board should review the budget and be confident that it reflects the organization’s priorities of the moment.”

In a nonprofit of say, two to 10 staff, board members often shoulder the work, such as preparing the budget. The board still needs to do its review. That’s their job holding the organization accountable to its publics.

The Four Categories of Board-Staff Tension

Tensions between staff and board over the budget typically break down into four categories:

First, staff may feel the board is micromanaging the budget, perhaps insisting on components or formats that the staff doesn’t want. For example, the board may think it’s unwise to budget in a possible grant before it is awarded, or a few board members might think the fundraising projection is too high, but in search of a balanced budget, don’t have suggestions on what expenses to cut. Such tensions are important reminders that every budget—in a nonprofit, in a household, in government—is a set of tradeoffs based on estimates and judgment calls. It is to be expected that there will be different views about what tradeoffs should be made and what estimates should be made. In most cases, being explicit about the estimates and tradeoffs lead to consensus—perhaps bringing a narrative with the budget that explains those. If they don’t, the board ultimately has the authority to determine the budget, although staff can also fail to follow the budget.

The second tension is an easier problem to solve, which is when board members pay attention to only the smallest and least important parts of the budget. They may be looking at a $1 million budget but choose to get concerned over $6,000 in supplies. This often occurs because board members can’t really make a determination whether $800,000 or $750,000 is the right figure for salaries—should that position be halftime or full time? So, they focus on something they get their arms around. Talk to the treasurer or another board member ahead of the meeting and see if that person can draw people’s attention to the big trade-offs and estimates rather than focus on tiny items. Sometimes small items can be combined into a single line item for the presentation. Other times the group has to muddle through these small items—especially when board members without financial perspectives want to feel that they are doing their job in reviewing the budget.

Remember: budget making is a process of negotiation, along with making estimates and making judgment calls. Like any negotiation, it will take leadership on both sides.”

The third typical problem is more frequent in larger-staff organizations, but can show up in nonprofits of all sizes: board members just glances at the budget and then rubber-stamps it. Of course, not everyone on the board needs to understand the budget enough to comment intelligently on it. Even in the smallest organizations it’s important to have at least one board member who understands finances, reviews finances, and gives a report to the board. Implicitly, what board members want to know is, “Should we be worried?” Delegating this question to a committee is a reasonable approach.

The fourth problem, though less common, occurs when staff balance the budget with a fundraising target for board members to raise that the board believes is unrealistic or even inappropriate. Sometimes it feels as if this new demand on board members has come out of the blue to board members who have no expectations of having to raise money. It’s bad faith for staff to put in board fundraising targets without coming to an agreement with board members about how much they can give and/or raise. Have that difficult discussion first.

Remember: budget making is a process of negotiation, along with making estimates and making judgment calls. Like any negotiation, it will take leadership on both sides. And sometimes, it will have to wait until there are either different people on the board or different people on staff.