Do Budgets Really Matter?

Budgeting is the focus of this column. But before I get to that, I first want to share a funny moment in a board room. While searching high and low, I have learned that not many folks view their board experiences as amusing. But I do have a link to what I believe is one of the funniest board meetings I have viewed, while acknowledging that the board members in this video are truly earnest and passionate about their work. This was first shared by John Oliver. While this is submitted here just for your amusement (I’m certain you can benefit from a hearty laugh), I do plan an upcoming column on the subject of meeting rules, so stay tuned. And should you have memory of a humorous moment in the board room, please share.

Ok, so back to budgeting.

This column will not be about how a budget begins by estimating expenses and income for a fixed period (mostly annually), based on what an organization is planning to accomplish. I am certainly not going to preach about how to estimate the number of planned activities (aka programs) and the type and number of personnel and non-
personnel resources that will be needed to accomplish goals and strategies. And finally, I will not discuss in depth the seven types of income sources and how they should be estimated to pay for projected resource needs. Nor am I going to discuss the concept of “spreading” indirect costs (the resources that are used to manage or fundraise for programs, or run an organization overall) to ensure that all the real expenses for pursuing a project or mission are counted.

What I want to discuss instead is the role of budgets in an organization and its meaningfulness to a nonprofit board. I recently heard a CEO of a large nonprofit declare that “a budget is only reference material for the board. Things change throughout the year and so, too, should budgets. Budgets are fluid!” This statement is also code for: Budgets give a board the feeling they are fulfilling their fiduciary duty.

But if this is true, why budget at all? Why, for instance, should a board go through the exercise of approving an annual budget? Why, at the end of any period (I prefer quarterly if I want to truly understand changes in the plan), line up the board-approved budget with the P&L and calculate a percent that shows how ahead or behind the organization is in relationship to the budget? And why are budgets presented to funding sources? Why at all bother to develop a budget and even consider its numbers if a budget really just doesn’t matter?

I argue that a nonprofit’s annual budget matters a lot. But unlike what I hear from some executives, a budget is not a fluid set of calculations to be modified throughout the year. Instead, I view the budget as achieving two purposes: mission and accountability.

From a mission perspective, the budget is the plan for how resources will be garnered and used to achieve the annual plan, which in turn achieves the strategic plan that is meant to derive outcomes around the mission. At the same time, the budget, when compared with actual income and expenses for a specific period, indicates how well plans were financially executed: plans both for obtaining revenues and plans for implementing programs.

Yes, things change — intentionally and unintentionally — but a budget should not change. It is the constant by which all else is measured. Yes, managers may adjust to daily challenges and may even have to seek the board’s counsel as internal and external events may drastically affect the ability to obtain and deploy revenues. But because of the budget and the comparison with actual financials, the board is able to understand the nonprofit’s standing at a point of time and be able to understand what action is needed. So, too, will the board be prepared for thinking about the coming year and its mission-focused direction. So, no, a budget should not be fluid.

Editor's Note: This Leading the Board column was originally published in the July/August 2020 print edition of NonProfit PRO.