FYI Blog

The Financial Responsibility of Nonprofit Boards

Allison Porter - 2015 New HeadshotAlthough I’m not a legal expert, I’ve navigated enough board finance committee meetings to be keenly aware of how hard it is to know exactly where the lines are drawn. What is a nonprofit board’s scope of management? Its technical responsibilities? And how do we ensure financial transparency, so that donors and constituents have confidence in how the organization is run? 

This post is not meant to be comprehensive, but rather a basic primer on the overarching financial areas boards must focus on (with links to more information). Keep in mind that each nonprofit and board is unique and will have unique requirements.

First, we need to understand that, as board members, our fiduciary responsibility is to oversee the nonprofit’s assets to ensure they are used in accordance with the donors’ intent and in keeping with the charitable mission of the organization. As board members, we are responsible for:

ü  Approving and overseeing budgets

ü  Integrating financial management into long-range strategic planning

ü  Managing investments

ü  Managing crises

ü  Managing and overseeing cash and cash flow

ü  Managing reserves

ü  Reviewing and approving audits

ü  Overseeing capital budget and ensuring long-range budgeting for capital repair, maintenance, and replacement (as appropriate)

ü  Conducting risk assessment, including insurance and liability

ü  Ensuring compliance with federal, state, and local legal, reporting, and IRS requirements

A critical step: understanding the breakdown of responsibility between board and staff. Not all board members need to be familiar with financial terms and concepts, but each organization must develop a clear and explicit agreement to ensure financial accountability. See more at: http://www.blueavocado.org/content/board-staff-agreement-financial-accountability#sthash.QQyjZZ7I.dpuf

Managing a nonprofit from a reporting standpoint is not much different than running any other business. Boards need up-to-date financial information to make decisions. I recommend customizing reports to the needs of your board and working closely with staff to create accurate and actionable reports. Financial reporting breaks down as follows:

  • Accounting reports: Balance sheet and profit and loss from the accounting system. This includes an executive summary, actual to budget, current year, and year-over-year comparisons. Review these monthly, including projections. Are we over? Are we under? Are there problems or opportunities?
  • Cash-management reports: Nonprofits’ sources and uses of cash must be tracked carefully.
  • Profit center reports: A detailed analysis of how different profit centers are producing, with an annual report and year-to-year comparison.
  • Budget analysis: A board needs detailed analysis of year-over-year budget performance trends to accurately analyze and assess a proposed budget.
  • Benchmarking reports: How is our nonprofit doing compared to our peers?
  • Dashboards: Dashboards have become a popular way to simplify data and make it easier for boards to understand. But you run the risk of oversimplifying complex financial pictures. Designing and using an effective dashboard takes diligence and leadership, but it should not replace a finance committee’s detailed review of the reports I’ve outlined here.

Finally, the board must ensure the following policies are in place and audited.

Review annually:

  • Conflict-of-interest policy, signed by all board members
  • Investment policies
  • Fraud-prevention practices
  • Executive compensation

Review every three to five years:

  • Gift-acceptance policy
  • Whistleblower policy

While not all states require one, an annual audit is a valuable third-party review of accounting systems and a safety check for financial compliance in critical policies. Furthermore, it demonstrates a commitment to financial transparency, which is critical for donor and constituent trust. Learn more here: https://www.councilofnonprofits.org/nonprofit-audit-guide

By understanding the primary areas of financial responsibility, you can ensure basic compliance and accountability — and then broaden the conversation around long-term financial sustainability.