Board Member Perspective – Questions to Ask When Reviewing a Budget
Have you ever received a budget for approval and are not sure what you need to be looking for or what questions to ask? We have a few questions that you can ask next time you are in that situation.
What are the programmatic priorities being set by this budget? If this is not clear in the budget document, then ask that it be clarified. The board sets the priorities for the organization and the buckets where the organization spends its money are reflective of its priorities. The board should have the opportunity to discuss these priorities and make sure they agree with them.
Does the budget result in a surplus, a deficit or breakeven? A nonprofit organization can and should operate with a surplus. Surpluses allow the organization to plan for the future by establishing reserves. Reserves can be used for future projects that will generate a “planned deficit” or for lean years when the funding sources are not coming through as expected. Deficits can be approved by the board if there is enough reserves to cover it and if it advances the organization’s mission. But these results need to be clear in the budget and need to be discussed as acceptable.
What results is each type of activity generating? We like to divide the activities of an organization into grants (you must spend every dollar received), fee-for-service (you can deliver the services at a surplus), conferences and membership (as long as you deliver, it doesn’t matter how much you spend) and internal functions (these don’t have any specific funding but are covered by unrestricted grants, indirect cost recovery or surplus from other activities). Understanding the results of each activity allows you to see how they cover each other and whether a desired surplus can be achieved by focusing on a particular activity.
Is there a personnel budget? Personnel costs tend to be the largest line item expense for most organizations. This expense has to be carefully planned in terms of positions, length of time, and salary. Ask if the positions are compensated fairly and at market rate. The success of the organization is dependent on maintaining committed and capable personnel. Each year’s budget should consider pay increases to help with staff retention.
Does the organization have a negotiated indirect cost rate? Recovering indirect costs is crucial for funding internal operations. This is an area where many organizations have problems. The indirect cost rate should be reflective of the organization’s true indirect costs and the organization should always request that grants reimburse at that level. Anything less will make the cost of running the program(s) with that grant more expensive for the organization.
Being at a board meeting while a budget is being discussed can be a very intimidating experience. But having a discussion around the questions above can help you understand better the process followed in preparing the budget and trust that the numbers reflect not only an achievable goal, but also the priorities of the board for that organization.