Ensuring that the annual operating budget is aligned with the strategic plan was one of my greatest takeaways when I was enduring ‘audit committee weekend’ as part of the corporate director certification program. LoL!
I learned that many of the best questions for management come from non-financial people like me around the board table. Why would that be?
While I believe the audit partners teaching that program module wanted to get the non-financial people excited about being on finance and audit committees, they were also making the key point that today’s era of compliance and regulation causes professional accountants and financial experts on the board to focus on those priorities first.
The question of whether or not sufficient funds had been allocated to strategic priorities was considered to be the kind of intuitive question that a non-financial director might ask. And that lit me up. I had a role and a reason to make an effective contribution.
What are the underlying assumptions informing the new budget? Are we all on the same page?
For many of the boards that I’ve been involved with, the annual budget cycle is relatively straightforward. The CEO or Executive Director has an early discussion with the board chair, then gathers the management team and does the work to produce a draft operating budget.
The heavy lifting takes place when the draft budget is presented to the board’s finance committee for vetting and feedback. It’s also where I can contribute my questions if I’m on that committee. Adjustments are made. The committee then passes a motion recommending the budget be presented to the full board for discussion and approval.
Are we done?
What is the role of a board director who is not on the finance committee and is seeing the budget for the first time? If that’s you, you have the right and the duty to ask questions if you’re curious about anything related to the proposed budget. It’s part of the board’s due diligence. Sometimes the ‘dumb’ question is the one that triggers a valuable discussion.
Granted, the board does delegate its work to the finance committee for oversight of budget preparation. When the budget is presented to the board for approval, it should give all directors comfort that it is aligned with the strategic plan and that the organization’s strategic priorities are funded. And if that’s not the case, then why not?
As a board director, you should be able to read and understand the organization’s financial statements including the annual operating budget. That doesn’t mean you need the same level of financial expertise as a professional accountant. But you do need to understand what someone of your skills and background would be expected to know about the financial matters on the board’s agenda.
Courtesy of our colleague, Mala Sachdeva, CPA, here are a few questions all directors could consider asking when reviewing the annual budget:
Updates will be provided during the year so the board can determine whether the financials are still on track. Sample questions include:
Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online hub with hundreds of guideline questions and resources to help prepare for your next board meeting.
Share Your Insight: What aspect of the annual operating budget is your first priority for review?