Warning Sign #6: Budget

Sep 8

2 min read

A graphic titled "KNOW THE SIGNS: WARNING SIGN #6" from Charter Sage CPA, featuring the question "Is Your Budget Built on the Right Numbers?" in blue text. The banner includes a subtitle, "A Financial Guide for Florida Charter School Boards," and notes it is part of a "10 PART SERIES." On the right, a person holds a large stack of books and financial documents over open notebooks.

The annual budget establishes the financial framework for the school's operations and sets clear boundaries within which management operates. While budgeting can sometimes feel complex or contentious, much of the uncertainty can be mitigated by focusing on the primary drivers of the model.

Enrollment (headcount) is the absolute foundation of revenue projections. Once enrollment is reasonably estimated, staffing levels can be aligned accordingly, and facility costs are generally known and relatively fixed.

The 70% to 90% Rule of Thumb

As a practical rule of thumb, approximately 70% to 90% of each revenue dollar is typically committed to payroll and facility-related costs. The remaining 10% to 30%—while smaller in proportion—is often where the most discussion, scrutiny, and congestion occurs during the budgeting process.

Management Prepares, the Board Governs

To maintain proper internal governance, there must be a clear distinction of roles:

Management's Role: Given their proximity to operational assumptions and underlying data, management is responsible for developing and presenting a detailed, well-supported budget.

The Board's Role: The board's role is to review, challenge as appropriate, and approve the budget at a summarized, strategic level.

Persistent challenges or gridlock in the budgeting process may indicate underlying governance or process issues, such as unclear roles, board over-involvement at the wrong levels, or a disproportionate focus on immaterial items.

Practical Board Oversight Strategies

To enhance oversight and clarity, consider the following best practices:

Focus on Variances: We recommend presenting budget-to-budget comparisons that clearly highlight key changes from prior approved or amended budgets. This allows the board to focus on meaningful variances rather than attempting to evaluate every single underlying detail.
Protect the Fund Balance: As a matter of sound financial stewardship, boards should never approve budgets that project a negative ending fund balance without a clear and credible plan to address the deficit.
Amend as Conditions Change: It is entirely normal and appropriate for boards to amend the budget during the year as conditions change. It is also common practice to adopt a final amended budget that aligns with year-end audited financial results, thereby providing formal board approval of the school's actual revenues and expenditures.

Remember during this process: it is an estimate, and no one is clairvoyant enough to get it exactly perfect!

A budget is a living fiscal map, not a rigid document chiseled in stone. When management builds a solid foundation based on realistic headcounts, the board can provide high-level strategic oversight without getting bogged down in the minutiae.

But a great budget only keeps you on track month-to-month; it doesn't protect you from unexpected emergencies. To find out if your school has the safety net it needs to survive a rainy day, we turn to Warning Sign #5 — Fund Balance.

This series is based on the CharterSage CPA guide: "10 Financial Warning Signs Florida Charter Boards Should Watch."