November 2014 – By Harvey Gail, MBA
In the fall, organizations begin to take a look at where they’ve been and their predictions for the future. It’s budget season. If you have been elected to a nonprofit board this is one of the most important jobs you have. You don’t have a crystal ball, so you’ll have some decisions to make. There are tools that can help you with this process.
The first tool is your profit and loss statement (P&L). It’s the most important document for budgeting. The profit and loss is a summary of where your organization has been in the recent past. Every board member should receive an education in both how to read it and what areas or spending/income categories are especially important for your organization.
The other essential tool is your strategic plan. It outlines your priorities – your strategic initiatives. If you don’t have a written plan, odds are your board has outlined areas that are of central importance to your nonprofit.
The third tool is your balance sheet. It is a financial snapshot of your organization. Of course, there are some subtleties – whether the reports are cash basis or accrual – but essentially this is where you stand now. It shows how much money you have in all of your accounts, whether you owe money and your net income as of the date of the report. Compared year to year, you can see if your organization is growing or shrinking – financially speaking.
Now to the budget and the three decisions you must make as a board. The budget is where your balance sheet, P&L and strategic plan come together.
The first decision is whether to plan to maintain the same financial position, build up more reserves, or operate in a deficit. I have seen many boards struggle with this tricky decision. There are many reasons that could justify having less or more income at the end of the fiscal year. There is no legal requirement that an organization ends any particular year with “0” net income. Over time, the IRS (or more likely your stakeholders) will take notice if you keep bringing in more than you spend. But it also may be quite justifiable to make a profit. Say for example, the organization has launched an expensive new program that will require capital expenditures. I have also seen associations build up a nest egg year after year for fear that not making money makes them vulnerable somehow. That kind of thinking reflects fear on the part of board members and a lack of vision in how the nonprofit can benefit its stakeholders now. Having a good reserve policy will help guide these decisions in the future.
So the second decision – really a series of decisions – is what to put “in” the budget. Your budget is a version of the profit and loss report that is oriented to the future. Most of the time being “in the budget” refers to an expense item.
So the third decision is how to offset new expense items that were added. What should be added to the income side of the budget, removed from the expense side to balance out the budget item that was added, or is having less net income or even a loss at the end of the year justifiable.
OK, actually, there are really 6 decisions (and a whole lot of little ones). But the bottom line is with the tools available to you as a board member, P&L, strategic plan and balance sheet; you should be in a great position to make the right decisions to lead your organization forward.
Harvey Gail is President of Spire Management, LLC a nonprofit/association management, leadership development and event planning company in Salem, Oregon. http://www.SpireManagement.com or Twitter.com/harvgail.