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