Nonprofit MythBusters Myth #3: Financials Are Too Confusing for Me
By: Judy Chambers
Myth #3: Financials are Too Confusing for Me
When you serve on the board of a nonprofit, you agree to wear many hats: cheerleader, ambassador, strategic planner, and so on. You recruit and supervise the executive director. You provide governance oversight to make sure the organization fulfills its legal obligations. And you are also the steward of other people’s money.
That’s right, other people’s money. Your organization’s funding probably comes from a variety of sources, including individual donors, foundations, corporations, and government grants (our taxpayer dollars at work). This funding enables your organization to meet its mission by providing programs and services. Think of it as an investment that each of these funders is making. They are investing in local arts programs, animal welfare, social justice, teen development—in other words, they’re investing in the missions they believe in.
Their return on investment comes in knowing they are helping those missions. They rely on organizations like yours to be good stewards of their funds—to ensure that their money is managed well and put to use effectively—which is why it’s your responsibility as a board member to understand and monitor your organization’s finances.
You receive periodic financial reports, usually in conjunction with board meetings, whether monthly, bimonthly, or quarterly. Your board probably votes to accept or approve the financial reports, which means you need to have a working knowledge of your organization’s financial situation. While you don’t need to be an accounting expert, you should be asking a few key questions before voting:
What’s the big financial picture? Where does your organization keep its money: checking, savings, CDs, other investments? You need to see, at least once each year, the sum of all the money. Are some of the funds restricted? That means they can only be spent for specific purposes. Sometimes treasurers and executive directors are reluctant to share the big picture because they fear that the board may not respect the plans that have been made for restricted funds. Use your leadership skills to reassure them that full disclosure is not only smart, but it will also build more effective board members.
Are we living within our budget? Financial statements often show monthly expenditures compared with what was budgeted, called budget-to-actual. They also show spending for each line in the budget for the year-to-date (YTD) as a percentage of the total amount budgeted for that line item. This gives you an easy way to see if revenues are coming as planned and if expenditures are in sync with what was budgeted. Not all expenditures are made on a monthly basis—for instance, insurance premiums are usually paid annually. So if you see that 100% of the amount budgeted for an expenditure has already been spent by the third month, find out if that’s a concern. In the insurance example, it’s not a concern because the organization won’t have to pay any more premiums this year.
What are the major trends in the regional economy? How are they impacting us? As I write this blog, gasoline prices are increasing rapidly and may continue to do so. If your organization expends a lot of money on transportation—a mobile health van, meal delivery, in-home visits, etc.—you’re likely to overspend on the transportation line item in your budget. Will you have sufficient funds for the entire budget year, or should board and staff discuss amendments to the budget?
Do we have sufficient funds in reserve? A financially healthy organization plans for unanticipated issues by setting aside operating funds. This may be done in the operating fund, in a savings account, or elsewhere. It’s a good idea to reserve enough funds to cover two to three months of operating expenses. Remember those funders who are investing in your organization? They want to see a stable financial picture that includes reserves.
Are we being strategic in managing our finances? Are proper checks and balances in place to protect against mismanagement? Who is providing oversight for purchases, contracts, credit cards, and other expenditures? If your organization has funds to invest, how often are investment strategies revisited to achieve the best earnings? You may not have specific responsibility for this oversight, but you do need to make sure someone is doing it.
In order to answer these questions, you need a good understanding of the financial reports that you are asked, as a board member, to approve. You see the numbers, but is your organization explaining the finances in plain English? How can you tell if the numbers you’re looking at are a cause for concern? If you’re not getting the information you need, ask for a brief narrative with each financial report. This can be as simple as a few bullet points to answer each of the five questions above.
When you ask for more information or clarification of financial statements, it means you’re fulfilling your responsibility for financial stewardship. And if the reports are not easy for you to understand, there is a very strong possibility that some of your fellow board members are equally perplexed. You will be providing a great service to them as well.
Accounting and financial management may not be among the skills and expertise that you bring to the board. Just as other board members rely on you to provide guidance in the areas where you shine, think about building your board skills in dealing with other people’s money.