Nonprofit Boards have a big job. One of the biggest parts of that job is fiduciary responsibility — making sure that the organization is funded, and that funds go to supporting the mission. Reviewing organization’s financial condition is one way that Boards fulfill their fiduciary responsibility.
How do Boards review the organization’s financial condition? It all starts with receiving and reviewing periodic financial statements, and analyzing financial performance in relation to the budget and financial ratios.
Nonprofit Boards should monitor financial performance and take action in four areas:
- Budget vs. Actual Performance
The year-to-date budget should be compared to actual performance. Analyze variances between budget and actual performance, especially for key income and program or administrative expense categories. Identify why variance from plan are occurring for significant differences and line items.
- Liquidity
Periodically assess four financial ratios to identify trends and their impact on fundraising and other plans:
- Days Cash on Hand – days of operation with no funds received and no investments liquidated
- Days Cash and Investments on Hand – days of operation after liquidating investments and before borrowing funds
- Current Ratio – divide current assets by current liabilities to assess overall financial health
- Debt Ratio – divide total liabilities by total unrestricted net assets to assess the need to reduce leverage
- Fund Raising
Assess the potential for overreliance on one individual funding source, indicating the need to diversify. Benchmark fundraising expenses in relation to funds raised against Charity Navigator or another metric to determine the return-on-investment of individual fund raising events and activities.
- Program Expenses
Measuring the relationship of each program’s expenses to overall expenses helps the Board to prioritize their attention on programs where more organizational resources are invested.
Nonprofit Boards fulfill fiduciary responsibility by monitoring the organization’s financial condition and making prudent decisions to maintain financial stewardship. By focusing on the four financial areas above, Boards can assess and act appropriately on financial performance.