Financial literacy

Does Your Board Really Know the Numbers?

Nonprofit board members have a legal obligation to the organization’s fiscal health. Yet, many struggle to fulfill their fiduciary duties related to budgeting, finance and oversight. The culprit is often a fundamental disconnect between the nonprofit and for-profit worlds.

Nonprofit financial statements are a tough read for board members with for-profit backgrounds. They often struggle to comprehend the unique terms and concepts used in nonprofit accounting.

Where the Disconnect Occurs

Unlike a for-profit business, no one “owns” a nonprofit. The goal is not to maximize earnings, but rather to carry out the nonprofit’s purpose or mission. So board members need to wrap their heads around some often-unfamiliar concepts such as:

• Program accounting — Nonprofits are required to show how money is spent, rather than how much profit was earned. Unlike profit oriented businesses, which use a single set of self-balancing accounts (or general ledger), nonprofits can have more than one general ledger (or fund), depending on their financial reporting requirements. The organization must be able to produce reports detailing the expenditures and revenues for each of the organization’s individual funds, and reports that summarize the organization’s financial activities across all of its funds.
• Revenue and expense recognition — In the for-profit world, revenue is matched with expenses, and a business’s P&L reflects net income or net loss for the year. By contrast, nonprofit financial statements focus on changes in net assets. Donor promises to give are recorded as revenue when the promise is unconditional — without regard to when the monies are received or expended. This causes revenues to often be reported in a period before they are received or used.

Failure Is Not an Option

In many nonprofit organizations, a finance committee reviews the financial statements in detail and then reports the findings back to the full board. Still, all board members must have a basic understanding of the organization’s financial statements in order to fulfill their fiduciary duty. Specifically, they need to know why these numbers are important and what actions they should take when the financial reporting violates generally accepted accounting standards.

Ultimately, executive staff and board leadership must collaborate to make sure that board members are educated and informed regarding financial documents. Consider these ways you can help your board members fulfill their fiduciary duties:

Invest in some board training. Make sure to cover the basics of reading nonprofit financial statements as part of new board member orientation (consider having existing board members also attend for a refresher). Also consider inviting your external auditors (your CPAs) to the training session and asking them to provide comments. Then provide ongoing training for your board utilizing webinars, seminars, guides, checklists and other resources.

Prepare for productive meetings. Make sure that all board members receive your nonprofit’s financial statements at least seven days before the board meeting so they have ample time for review. The most effective reports use easily read charts and graphs to present the financial information — for example, a pie chart showing your budget broken down by program.

Put it in perspective. Present your financials in context by utilizing benchmarking data to show how your numbers compare to similar organizations. In the same vein, include trends that compare current financials to previous months. Another helpful way to present the data is with a 12-month rolling forecast that shows actual figures through the current month and budgeted figures for future months.

Utilize KPIs. Present financial dashboards or flash reports that provide a concise, consolidated view of your organization’s key performance indicators (KPIs). This might include the use of operating ratios, such as the ratio of income to expense by program and donor-to-budget ratios.

It’s Your Move

Understanding your nonprofit’s finances isn’t a luxury; it’s an imperative — not just for your individual board members, but for the good of your organization and your community.

For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.