Questions a nonprofit needs to ask to ensure its budget is on the mark

Published in the July 14, 2006 edition of Columbus Business First

An organization makes many decisions during the year that require its budget provide a reliable road map of how activities, revenue and expenses are expected to play out. 

Just as a cartographer rechecks his maps against satellite photos and  a scientist regularly recalibrates his instruments, it is important that an organization recheck its budget against what happened. 

The annual audit review is an excellent way to recheck the quality of your budget because it provides a systematic review of outcomes, reports and procedures. Unfortunately, too few organizations use the audit review to do this. That is a mistake.

The first thing you should do it to double check that your budget reports and your audited statements are using the same categories and the same cash or accrual basis of accounting.

Next, ask the finance staff the following questions:

• In what ways did the predictions in our monthly budget reports (how we expected to end the year) differ from where we ended up (this audit)?

Use the audit to see how well your budget reports were telling you how the year was going to conclude.

Your audited reports tell you how much revenue and expenses grew the past year. What did last year’s budget predict?

Near the close of the year you received budget reports forecasting how the year would end.

Were those reports on the mark? If not, why not? Does the audit include some new revenue or expenses that were not anticipated in the budget reports? If that was the case, are you satisfied with the decision process that introduced those new revenue or expenses?

• What information does the audit contain that indicates a need to change this year’s budget?

Use the audit to see if your budget is leaving out important activities or using assumptions that are no longer realistic. One of the most common discoveries is that entire categories of revenue or expenses are “off-budget.”  Common exclusions are investment gains and losses, use of reserves or fund balances, activities funded by restricted grants and capital campaign revenue and expenses. Make sure you know what is excluded and that the entire board is comfortable with the implications of using a partial budget. It is also a good time to double check whether your budget assumptions are realistic.

If the final results show assumptions about growth in revenue, gifts, cost of materials and outside services, health-care costs, yields on pledges and other key factors in last year’s budget were off, you must re-examine your current-year budget assumptions to be sure you won’t repeat the same mistakes.

• What storm clouds could be on the horizon? 

While you are examining the results for the past year, you should re-evaluate your vulnerability to bad luck in the coming months.

Look at your audit’s operating results (revenue less expenditures) before one-time credits or charges, borrowing, use of endowments or exceptional gifts. If this adjustment reveals a minimal surplus or a deficit, then you have little cushion against adverse developments. That means you should re-evaluate how well you can respond to crisis.

For example, if the budget erodes during the year, do you have enough assets that you can convert to cash to pay all debts and obligations that come due this year? Does it normally take more than 30 to 45 days to collect on invoices and pledges?

If so, at what point do you determine that you won’t receive the payments and write them off?

The annual review of your audited financial statements is an ideal time to recalibrate your organization’s budget by asking where it is most vulnerable and how effectively the budget is guiding managers and directors through the year.

If people in the organization ask why you have to have an audit meeting, ask them these three questions. If they can’t provide answers, tell them how they can make the meeting worth their while. 

For further questions and suggestions, visit www.proctorconsulting.org under the Audit Committees tab.

Allen J. Proctor formerly was chief financial officer of Harvard University and is the author of “Linking Mission to Money, Finance for Nonprofit Board Members.”  www.proctorconsulting.org

Copyright 2006. Reprinted with permission, Business First of Columbus Inc.