Equipping All Board Members for Financial Oversight

Do all of your board members understand your financial reports? Please don’t fall in the trap that some organizations do. I had a board chair whom had been on this organization’s board for several years tell me that the members of their board shouldn’t be concerned if they couldn’t follow the financial reports. “Most of the board members don’t understand them,” he said. “We count on the accountant and the banker who sit on the board to alert us if there is anything with which we should be concerned.”
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Monitoring Financial Performance

The board has two key financial management roles: to ensure that there is an appropriate financial plan and to endeavour to have actual financial performance fall within the plan parameters. The annual budget is the revenue and expenditures plan. Monitoring progress towards plan achievement involves periodically reviewing the financial statements, most often the balance sheet and the profit and loss statements.
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But the Board Has to Approve the Budget!

Many board members are so used to “knowing” that one of the most important things the board does is approve the detailed budget for the coming year that it doesn’t seem wise for them to not do so. Let’s consider the implications of the board approving the detailed budget versus approving budget parameters.

It is commonly accepted as a best practice, that whoever makes a decision is also the only authority that can change that decision. If the board “approves” the budget it is in essence deciding that it expects revenue and spending to be as planned. The board is saying that it is exercising the authority to determine spending details. Therefore, when customer feedback encourages staff to dramatically increase electronic communication and decrease paperwork, the CEO or CFO need to request the board’s permission to invest an extra $5,000 in related software. If the board only approved the budget parameters, management can order the software immediately upon learning that paper and printing costs will drop by $7,000, because the change does not increase the total office expenditures. Staff have the authority to make a change that will increase the bottom line.
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When Management’s Budget Doesn’t Align with Board-Set Parameters

In the budget model that starts with the board establishing budget parameters and then management preparing a detailed budget, the first budget presented to the board will not necessarily comply with the board’s requests. This may be because the CEO, personally and in consultation with the CFO, doesn’t believe the budget parameters permit achievement of the organizational goals, yet wishes to accomplish the goals. It might be that the CEO is reluctant to make the unpopular changes necessary to live within the budget. Sometimes the board hasn’t communicated its expectations in a way that was clear to the CEO.
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