Standard B5 Explained

What is an annual budget and why does the board need to review it regularly? A budget is a financial plan that reflects an organization’s broader strategic and operational plans.¹ Essentially, an organization’s budget is a tool to help it accomplish its mission. The annual budget is the board’s most important tool to ensure that their organization is handling funds and assets responsibly and effectively.² By approving and monitoring the annual budget, nonprofit boards ensure responsible stewardship of the organization’s financial resources.¹ Remember that each board member, not only the Treasurer, shares a responsibility to effectively manage the organization’s financial resources and could, in some circumstances, be held personally liable for the organization’s debts.²

An annual budget can be an effective tool for monitoring your organization’s financial activities if the following 5 criteria are met:²

• The budget is be prepared thoughtfully
• The budget is prepared and / or approved by the board
• The time periods covered by the budget correspond to the time periods of the organization’s financial statements
• The financial statements are prepared in a timely fashion and are compared to the budget (preferably right on the statements)
• The board discusses and is prepared to take action in cases where a comparison of financial statements to budgets shows a significant discrepancy

Board members may wish to ask some of the following questions during the budget review and approval process:

• What assumptions guide the budget’s estimates of revenues and expenditures for the coming year?
• Are there significant differences between this year and last year’s budget? What accounts for these differences?
• What are the plans for staff compensation for the coming year?
• What changes to programs and services are reflected in the budget?
• Does the budget align with the strategic plan?
• What different scenarios have been considered when preparing the budget?
• Do we have a cushion to guard us against unanticipated or adverse events?

From "Accreditation Preparation Workbook Section B: Financial Accountability & Transparency,"  Katharine Zywert, Social Prosperity Wood Buffalo at the University of Waterloo, 2013.

1. “A Guide to Financial Statements of Not-for-Profit Organizations: Questions for Directors to Ask,” The Canadian Institute of Chartered Accountants, 2012.
2. “Financial Responsibilities of Not-for-Profit Boards: A Self-Guided Workbook,” The Muttart Foundation and Alberta Culture and Community Spirit, 2008.