Members of your nonprofit’s board of directors likely joined because they had a passion for the organization’s mission or another board member persuaded them to come aboard. But even if new members are enthusiastic, wise or skillful, they may not fully understand their fiduciary responsibility to be good stewards of the public’s money, have a working knowledge of finances — or even be good with numbers.
With these challenges, how can a board assure fiscal responsibility? Strong board operating procedures, the right committee structures and appropriate training provide the platform for effective fiscal oversight and sound decision making.
The board treasurer
One governance best practice is to make sure that at least one board member is a CPA or an experienced financial individual — to provide insight into the nonprofit’s finances and explain financial matters to less financially savvy board members. Typically designated the board treasurer, this person facilitates transparency of the organization’s financial health to the full board and the public.
It’s not, however,the treasurer’s duty to maintain the nonprofit’s books and records — the chief financial officer (CFO) generally handles that responsibility. (In a smaller organization, it may be a bookkeeper or an external CPA.) The treasurer typically interfaces with the CFO monthly, bimonthly or quarterly, depending on the frequency of board meetings, and reviews the financial information for accuracy.
The treasurer also compares actual and budgeted numbers and identifies any unusual activity, such as a drastic decrease in cash contributions or significant expense variances. He or she then presents this information to the full board at its next meeting.
Design by committee
Most boards are supported by committees, and that includes the financial front:
Finance committee. The finance committee, which is usually chaired by the board treasurer, comprises financially savvy individuals who aren’t necessarily all board members. Typical oversight duties are to:
- Set up or review annually the nonprofit’s internal control policies and procedures,
- Recommend an investment policy to be approved by the board and oversee the investment portfolio in the absence of an investment committee,
- Prepare or review for board approval an annual operating budget at the beginning of the fiscal or calendar year,
- Review and approve monthly financial statements, reconciliations and budget to actual reports,
- Review the Form 990 informational return, and
- Manage cash flow.
If the nonprofit operates without a compensation committee, the finance committee should review and recommend the executive director’s salary. This usually entails looking at salary surveys to see if the recommended compensation is reasonable along with performance evaluations.
Audit committee.If the organization has an annual audit, a best practice is to have an audit committee composed of individuals who have financial experience and are independent from the board and staff. (In the absence of an audit committee, the finance committee can fill this role.)
The audit committee’s main responsibility is the oversight of the annual audit process, including interviewing audit firms, obtaining fee quotes and recommending the appointment of an independent auditor. The auditor selection process should be conducted without influence from management to avoid conflict of interest.
The audit committee will meet with the audit firm and discuss the nature, timing and scope of the audit, including areas of focus. After the audit, the committee will meet with the auditor to review a draft of the audited financial statements, discuss any issues identified in the audit, and review any letter to management prepared by the auditor, including possible recommendations to strengthen internal controls.
Once the committee agrees with the audit results, it will recommend that the board accept the audit and findings as prepared.
Financial documents the board needs to understand
All board members will review a number of reports to gauge the nonprofit’s financial health. Thus, they should possess at least a basic understanding of:
- The statement of financial position, which summarizes the total assets, liabilities and net assets of the organization at a specific point in time,
- The statement of activities, which sums up the nonprofit’s activities for a specific period from a revenue and expense viewpoint,
- The statement of cash flows, whichsummarizes the cash inflows and outflows during the year from operating, investing and financing activities, and
- The statement of functional expenses, which groups expenses into program, management and general, and fundraising categories.
Additionally, comparisons of monthly budgeted amounts vs. actual figures identify where the organization under- or overperformed in its fundraising efforts and was effective or inefficient in controlling various costs.
Training and consultation
Your board treasurer, staff and CPA can be useful in training board members who aren’t well versed in the financial basics they need to know. And board members who are conversant in the financial business of your nonprofit will be positioned for effective fiscal oversight and sound decision making.
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