The majority of people on nonprofit boards serve because of the organization’s programs, its role in the community, or a personal involvement or connection to the organization’s mission or cause. Few come to the board table with a burning desire to understand the organization’s finances and business model and help it do a better job in these areas. Yet, maintaining financial accountability is one of primary responsibilities of board of directors. While it’s great to have a strong board treasurer or finance committee, it’s important that each board member takes the role of understanding the organization’s finances seriously. Some may have a steeper learning curve than others, but if every board member on every nonprofit board improved his or her financial oversight game by 1% in the six months, we’d see a healthier nonprofit sector by the end of the year.
Improve Your Understanding
Perhaps you’re someone who is comfortable with financial statements, but you don’t fully understand the format and the items in the statements that you see each month as a board member. If you need clarification about the information that you see in the monthly financial statements, you may want to ask the board’s treasurer or president for a short training or review—for yourself or the full board—on the reports. Chances are, if you are having difficulties understanding the information presented, so are some of the other board members.
It’s important that the board understands the finances of each activity in the organization. This means looking at an activity’s complete costs, as well as the revenue it generates. Complete costs include the direct costs of the activity (those costs that only occur because the activity takes place), the percentage of shared costs—such as rent, utilities, general supplies—assigned to that activity, as well as an allocated portion of administrative costs, such as expenses for accounting, human resources, and organizational leadership. Specific program activities may generate earned income or attract restricted grant or donor funding. Fundraising activities raise funds through event registration and donations. It’s particularly important to look at both sides—the projected revenue as well as the anticipated costs—of each fundraising activity. Many boards have been surprised and disappointed to discover that their seemingly successful fundraising event may have appeared to hit its goal, but when costs were figured in, the event barely broke even.
Asking questions about the financial statements can help put the information from these reports in context of the work of the organization. One particularly useful question is, “What are these reports telling us?” This asks for the narrative about the numbers, which may be more readily understood by board members. For the person who is answering the question, it is helpful to refer to the specific numbers in the statements to help guide board members through the story that the numbers provide.
Consider the Future
If there are variances between the budget and the actual numbers or if you notice a trend that seems concerning, learn more about the impact this will have in the future. Using financial projections or asking, “If this trend continues, what will be its impact?” are ways to understand the implications of the current financial picture on the organization’s future financial health. The sooner that the board spots problematic financial trends, the sooner it can intervene to improve the situation.
All nonprofit leaders—not just those serving on the finance committee—are responsible for the organization’s financial oversight. Gathering information, asking questions, and thoughtfully considering the impact of today’s activities on the health of the organization tomorrow, can help you improve your skills and strengthen your organization.
A version of this post first occurred in the Corridor Business Journal.