May 18, 2018
Is Your Board Equipped to Handle Your Budget?
Being on a nonprofit board can require you to wear many different hats and one of the most important aspects of being on a board is learning the budget approval process. Some board members come equipped with a business background—comfortable dealing with budgets and numbers. On the other hand, some may not have the same appreciation or knowledge base when it comes to understanding the financials.
Since each nonprofit organization has a different approach when it comes to handling their budget, there can be some confusion or differences of opinion amongst board members. Educating your board on the proper key terms, types of budgets and the different approaches, is key to ensuring the best decisions are being made on behalf of the organization.
Here are a few key terms to understand when learning the basics of a budget and some specific terms used when discussing nonprofit budgets:
- Cash basis: A method of recording transactions for both revenue and expenses only when the corresponding cash is received or payments are made.
- Accural basis: Under the accrual basis of accounting, revenues are reported on the income statement when they are earned.
- Income-based budget: This budget requires a consistent income based around a particular period.
- Zero-based budget: A method of budgeting in which all expenses must be justified for each new period.
- Capital expenditures: Money that is spent by a business or organization on acquiring or maintaining fixed assets (i.e. land, buildings and equipment).
- Depreciation: A reduction in the value of an asset overtime—due to wear and tear.
- Fixed costs: A range of different types of business costs, such as rent, that are constant.
- Variable costs: A cost that can vary in relation to changes in the volume of activity.
These terms will help your board increase its financial literacy by reducing the mystery of nonprofit budgets, financial reports and auditing. Since a budget plays such a vital role in a nonprofit’s ongoing financial viability, it’s important your board members can fully understand and approve such budgets.