While board members bring a variety of important skills to nonprofits, they are expected to guide the organization through often turbulent waters, which requires understanding of key financial information.
If the organization is to achieve its mission, it needs board members who can guide it appropriately.
Many board members come to organizations because they are passionate about the organizations mission or they wouldnt be there, but its just as important that they understand the financial responsibilities and expectations that go with being a board member and how to fulfill those responsibilities.
Since monthly board meetings typically last two to three hours, that doesnt provide a lot of time to guide the entire organizations programs and finances. What board members need is key financial information and an understanding of how to use that information to make decisions.
Training Program Puts Everyone on the Same Page
It is not uncommon to have only one or two people on the board who understand finances. Good strategic management requires an understanding of financial indicators. These indicators tell the board not only whether the organization is making money, but which programs are the most successful and why.
An effective way to bring all board members and management to a similar level of understanding of the financials is by providing training for the full board. This puts everyone on the same page and provides all board members with a basis for understanding financial statements, regardless of their background and experience with nonprofits.
A typical training program employs the following approach.
Session 1: How Nonprofits Differ from Other Organizations
Nonprofits are granted a special status because they fulfill a public good. A number of regulations guide what they can and cannot do and its vital that board members understand the legal environment in which they operate. Since nonprofit spending must benefit the mission of the organization, for example, no expenditure can result in a benefit to an individual associated with the nonprofit.
Session 2: Board Responsibilities
Most fundamentally, without money nonprofits cant have programs, and its the board that ensures the organization achieves its mission in the most cost-effective way.
Because the board has responsibility for the long-term health of the organization, it needs to keep its eye on the multi-year strategic plan (or create one if it doesnt exist). However, many organizations tend to relate next years budget to last years actual results, which does not allow the board and management to focus on its planning and guidance role.
The budget should start with a strategic plan, which is translated into annual goals. For example, if the strategic plan includes a goal of increasing certain programs geographic reach or start a new program, those plans should be reflected in the budget, rather than basing it on last years results.
Budgets based on last years activity result in organizations that do not grow. Since the environment in which nonprofits compete and operate constantly changes, the board must ensure that the organization keeps pace.
Session 3: Interpreting Financial Statements
Fulfilling the guidance role means boards need to understand what their financial statements should look like and how they relate to each other. All three financial statements interrelate: the income statement, the cash flow statement, and the balance sheet. This session explains how.
Session 4: Understanding and Applying Benchmarks
Every nonprofit has unique needs, and more and more of them operate multiple lines of business. Financial ratios and relationships for one income-generating activity may differ from others. Its important to know industry standards in order to evaluate performance. Related to this is understanding the relationships between the budget, monthly statements, and annual audited financial statements.
The most important concept is getting management and the board to agree on the format and level of information that will be received in the future. Ultimately, the information needs to be provided to the board in a way that allows them to understand the key financial indicators in a short period of time.
Rebeka Mazzone, senior consultant at Accounting Management Solutions, Inc., works with nonprofits on a full range of accounting and financial management issues. Call her at 401-374-3222 or email to email@example.com.
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