Tag: fiduciary responsibilities

Managing Nonprofit Finances

Managing household or business finances directly impacts your and your family’s future. Managing nonprofit finances is just as impactful, with one big difference. Household and business finances involve your funds. Nonprofit finances consist of other people’s funds – contributions entrusted to the nonprofit by community members and other donors.

Managing nonprofit finances involves fiduciary responsibility for donor funds, which boils down to treating entrusted funds with due care, and only using funds to support the nonprofit’s mission. Effectively managing finances is one way that a nonprofit fulfills its fiduciary responsibility.

So, what does “effectively managing” mean? It starts with these three fundamentals:

  1. Actual vs. Budgeted Performance

Every month, the nonprofit’s year-to-date actual financial performance should be compared to the budget. Variances between budgeted and actual performance should be explained, especially for key income and program expense categories. Identify why variances are occurring and take remedial action, as needed. For example, assess the potential for overreliance on one individual funding source, indicating the need to diversify.

  1. Cash Flow

A monthly review of checking and money market account balances should be performed to determine whether cash reserves are adequate. The cash reserves target should be based on the amount needed to cover operating expenses without any funds coming in and without liquidating any investments. Another method to assess the nonprofit’s cash flow health is to assess unrestricted net assets vs. total liabilities.

  1. Long Term View

At least once a year, nonprofits should assess whether the financial aspects of long-term financial objectives are being met. Long-term financial objectives are often reflected in the strategic plan, the annual budget, and in Investment Policy and Board Resolutions. If established financial objectives are not on track to be met within the defined time frame, remedial action should be taken.

Managing nonprofit finances means fulfilling the fiduciary responsibility for the contributions entrusted to the nonprofit by community members and other donors. That boils down to treating entrusted funds with due care, and only using funds to support the nonprofit’s mission. Starting with the three fundamentals – year-to-date performance, cash flow, and long-term view – helps nonprofits keep promises to donors and make solid financial decisions.

Understanding Nonprofit Financials

Nonprofit Board responsibilities encompass many areas, including financial oversight to fulfill the stewardship role known as “Fiduciary Responsibility.” Understanding fiduciary responsibility is critically important because nonprofits collect and spend other people’s donated money. Failing to act with due care in the best interest of the nonprofit has serious consequences, such as loss of public trust. Lost trust equals lost donations.

One fiduciary activity is monitoring the nonprofit’s financial performance to ensure that funding requirements are met to support the mission. Board members, usually those serving on the Finance Committee, must receive complete periodic financial statements to oversee financial performance in relation to the budget, financial ratios, etc. 

Even if the Finance Committee is made up of experienced financial professionals, they may not have experience with reading nonprofit financials, which are presented differently than “regular” financials. Getting all committee members up to speed on reading nonprofit financials is no small task. Many nonprofits need help. 

Well, I have some good news for Nonprofit Boards to fulfill their fiduciary responsibility – two options for help with Understanding Nonprofit Financials:

  1. The Arlington Chamber of Commerce is hosting a virtual event, Nonprofit Forum: Understanding Your Nonprofit Organization’s Financial Health on Tuesday, July 20, from 11:00 a.m. to12:30 p.m. This educational event includes a dive deep into the details of financial statements, such as statements of financial position and cash flows to help nonprofit Boards understand and place value in these financial reports. Follow this link for details and registration – https://web.arlingtonchamber.org/events/Nonprofit-Forum-Understanding-Your-Nonprofit-Organizations-Financial-Health-3623/details
  1. BoardSource is an organization that provides resources for nonprofit governance and management, including financial oversight. Some resources are free, and others require paid membership. Check out their resources for Nonprofit Boards at https://boardsource.org/board-support/, including a free white paper describing how Boards can identify “yellow” and “red” flags in their financial statements. https://boardsource.org/financial-statement-flags/ 

Nonprofit Board responsibilities include financial oversight and fulfilling fiduciary responsibility. Understanding nonprofit financials, which are presented differently than “normal” financials, is critically important to making appropriate financial decisions and ensuring donated funds are used in support of the mission. Even experienced financial professionals serving on nonprofit Boards need help. Good news for them that BoardSource and the Arlington Chamber of Commerce have resources to help them understand their nonprofit financials.

Financial Skills for Effective Nonprofit Boards

Serving on a nonprofit Board is a big responsibility. Among other things, Boards are responsible for financial stewardship and oversight, also called “Fiduciary Responsibility.” Fulfilling financial oversight responsibilities doesn’t mean that every Board member has to be a financial expert. However, some Board members must have the necessary financial skills and knowledge to make appropriate financial decisions about the nonprofit’s donated funds and assets.

What skills and experience should Board members possess to effectively and appropriately fulfill the organization’s Fiduciary Responsibility? Should any particular financial professional background and experience be included in the Board’s membership? As usual, there isn’t just one “right” answer, but here’s some insight.

Effective nonprofit Boards often look to these four professional backgrounds to recruit some of their members:

Accountant

            Accountants have technical training and experience that help nonprofits ensure that they get clear and reliable financial reports. They are used to helping their clients understand their finances. They can provide that same understanding to their fellow Board members. Also, Board members who work in public accounting or in a corporate setting know how to use financial statements as planning and management tools.

Banker

            Bankers know the actions necessary to achieve financial goals and assess risk. Lenders and other banking professionals help a range of organizations meet their financial needs. That knowledge is hugely valuable to any nonprofit. Bankers’ experience in reading and interpreting financial information is also invaluable for making informed financial decisions. 

Project Manager

            Project management boils down to planning, tracking and controlling a budget, schedule, and resources to achieve a goal. Skills in those areas are an asset for any organization. Project managers have organizational and analytical skills to help nonprofits plan and assess financial decisions, monitor results, and track achievements, including programmatic results.

Chief Operating Officer/Administrator

            Board members with experience running a business, agency, or department provide an opportunity to increase your Board’s financial IQ. Chief Operating Officers and Administrators are familiar with the inputs and considerations needed to make informed and appropriate financial decisions. They are also accustomed to making difficult decisions under stress, handy to have in any organization. 

Getting the right mix of Board members with a financial background is crucial for nonprofits to fulfill their Fiduciary Responsibility. Effective Boards make sure that some of their members possess the necessary financial skills and knowledge to make appropriate financial decisions about the nonprofit’s donated funds and assets.

So, now you have some Board members with financial knowledge. How do they fulfill help the entire Board fulfill its Fiduciary Responsibility? Find out by coming back to read next week’s blog post, “Financial Duties of Nonprofit Boards.”