We often hear, “I don’t want to budget. I would rather have flexibility.”
But, your budget is not a straightjacket. It is simply a feasible, acceptable, baseline for income and spending.
Delegation of Authority
All spending must be authorized. The by-laws define who is authorized to receive and spend money. Normally, this authority is held by the Board of Directors, often as a matter of state law. The board can then delegate this authority to others, usually to the Executive Director or the Chief Financial Officer.
Here’s a sample Delegation of Authority for a small free medical clinic. The departments have no authority to spend money on their own.
Here is a delegation of authority for a larger nonprofit with a Financial Committee and a Controller / Comptroller. The Department Heads are authorized to spend in accordance with the budget. Each level, from Department Head through the Board of Elders, has authority to spend their approved budget, plus a percentage with a fixed cap. Each higher level is only concerned when a request exceeds those limits. They have great flexibility.
Three Approval Paths
Given the Delegation of Authority, there are three ways to authorize spending:
The Budget is the normal authorization. Your budgets are approved once per year by the highest authority in the organization. It represents a blanket authority to the staff and department heads to spend up to the line item / department / organization level budgets for the purposes stated in the budget.
Special Projects are a second channel of authorization. Special Projects are often used for capital campaigns and building projects. They are separate from the annual budget because they often cover more than one fiscal year and restrictions require that funds be segregated. They are approved at the level required by the Delegation of Authority.
Special Requests can happen at any time. This is when a department wants to spend money that was not approved vai the Budget or Special Projects channels. They are approved at the level required by the Delegation of Authority.
These last two authorizations are NOT budget increases. The Budget does not change. Changing the Budget destroys traceability, which is the ability to answer the question, “How are we doing with respect to what we planned to do?” Special Requests result in authorized variances to the Budget. The controller will keep a record of the authorized variances and this will become part of the monthly reporting.