USA Bylaws: Does This Require A Balanced Budget?

[Kanat]

I have been in the finance committee of a small non-profit board in the US where we disagree on whether or not this wording requires a balanced budget (meaning all expenses are covered with our income in any fiscal year = calendar year):

"... all expenditures must be within budget."

This is the relevant paragraph in our bylaws:

The Finance Committee is responsible for developing and reviewing fiscal procedures, and annual budget with staff and other board members. The board must approve the budget and all expenditures must be within budget. Any major change in the budget must be approved by the board or the Executive Committee. The fiscal year shall be the calendar year. Annual reports are required to be submitted to the board showing income, expenditures, and pending income.

Contention:

• I believe this wording is about operation after the budget is created and approved; staying within specified budget, which need not be balanced in a given fiscal year.
• Others believe this wording states we have to create a balanced budget, income must be more than or equal to expenses in our budget, every fiscal year.

Who is right? Is it ambiguous or pretty obvious what this means?

To add insult to injury, our finance committee's solution to create a balanced 2021 budget was to add an entry about fundraising money from cash in the bank that was almost four times our fundraising goal for 2021. Without this item, the budget would not be balanced. I have been saying for almost a year that this entry is past income, now an asset, and it does not belong in our budget, and the chasm between this budget and our financial reality grows every month but no one in the finance committee or the board accepts this. Almost all board members insist "but we have this cash" and at least one board member now claims this was aspirational.

This is the end of the line between this board and me. I'd appreciate your help.

 

[kirby]

It is simple English. You are correct in your contention. But save yourself some grief and depart from these idiots.

 

[Praz Finpoint]

Recording past income that as of the last financial year-end is an asset in the current financial year as income is a fraud - the organization is double recording the same income twice on the profit & loss in 2 financial years. So this is clearly is not allowed.

That said - there are 2 types of Budget - Profit & Loss Budget and Cash Budget - the former analyzes current income vs current expenditure, and the later, analyzes cash inflows vs cash outflows.

Now unless there are specific regulations governing Charity where in the current year, the expenses must never exceed income, I do believe it is possible in a given year for cash outflows to exceed cash inflows, even though income exceeds expenses, because the organization utilizes past cash accumulated for current year spending, after projecting the amount of cash at bank plus future income required to sustain operating expenditure for subsequent years.

For a Charity, it is unlikely beyond the need to fund operating expenditure, to hold excessive cash at bank in their accounts. Cash, via donations and grants, are provided by donors to the Charity essentially to fund activities and outflows to the beneficiaries of the Charity, and not to be maintained idle in the Charity with no purpose. If the Charity continues its method of restricting past cash available to fund future activities to the beneficiaries, the cash would not be effectively utilized and directed to beneficiaries and run the risk of not satisfying their charitable missions. There have been cases of Charities accumulating large amounts of cash in their accounts, which have come under scrutiny for not utilizing these funds for charitable causes, but rather diverting the funds to other purposes, such as investments in markets, renovations to the office, etc.

 

[Kanat]

Recording past income that as of the last financial year-end is an asset in the current financial year as income is a fraud - the organization is double recording the same income twice on the profit & loss in 2 financial years. So this is clearly is not allowed.

I understand. The Charity will not report income twice in tax forms, but created an apparently balanced budget for internal use where balancing was provided by cash in the bank, which I was saying cannot be used to create a "balanced 2021 budget". I'd rather everyone be honest and admit the 2021 budget was never balanced, take seriously how much a loss we are projecting, and be more financially conservative in 2022. At the end of 2021, our tax report will clearly show what we can already see in our accounting reports monthly: We are heading for a very significant net loss this year.
I also realize the money coming in must be used for our charitable purpose. I'm just worried our expenses are far more than our income this year, we have approved many major expenses rather quickly with a sense of urgency, and that this is not a sustainable path. On the positive side, some major expenses are long-term expenses/asset purchases. On the negative side, some expenses are overhead with the hopes that those expenses will make us appear more mature as an organization. To me the problem is that I don't think we can afford this much overhead at our income level today. Trying to look mature by increasing overhead feels like a child wearing their parent's clothes to "grow up".

 

[Praz Finpoint]

From my perspective, below are my views which you may take into consideration:

1. Cash from donations and grants must ultimately be used to sustain the ongoing operations of the Charity and excess to be used to finance programs for the beneficiaries of the Charity consistent with the mission and objectives of the Charity. Thus, I do not see the need to maintain excess cash in the bank and restricting said cash to be utilized to finance such programs, beyond the needs to fund the ongoing operations of the Charity for the following year. Thus it would be worthwhile to review the financial projections and budget of the expenditure required to sustain ongoing operations of the Charity for the next 3 years, and after taking into consideration, the annual donations and grants projected to be received, work backwards of the cash required to be maintained.

I agree with you where expenses are consistently exceeding income year on year, and by a significant amount, the Charity is not properly managed and this will soon become unsustainable, resulting in the Charity, like any other Company, to go into liquidation.

2. Expenditure of Charity will always be closely scrutinized. As a principle, the donations and grants must be used for the benefits of the intended beneficiaries. Approving expenditure for major expenditure that Directors knowing today based on their future cash flow projections and budget will result in unsustainable operations, and approved to make the organization appear "mature" without true benefits for the beneficiaries will result in a direct contravention to the organization's mission and objectives. If and when the Charity files for bankruptcy and goes into liquidation, questions will arise of where and why said cash was used for specific purposes, and liquidators will review retrospectively if the cash were used in the appropriate manner, which can result in liquidators going after the Board.