Nonprofit Boards Help Ensure Sound Financial Reporting Practices
By Leigh Tucker
Doing good by serving on the board of nonprofit organizations, always laudable, is becoming more demanding as public scrutiny of nonprofit financial management increases. But it need not become more onerous.
Increasing competition among nonprofit organizations for grants and donor dollars will intensify the pressure to demonstrate they are worthy of support. In this environment, the selection and development of board members with expertise in financial management will become more vital to organizational success than ever before.
Inviting knowledgeable, experienced men and women successful business people come to mind to serve on the board, who will press for professional financial management, may well be one of the most important decisions a nonprofit can make.
Adhering to best accounting and financial reporting practices not only puts those organizations on a sounder financial footing, it also helps them maintain their independence by minimizing potential public scrutiny.
Best financial management practices for nonprofit organizations include the following:
Document accounting and financial management practices. Organizations can't know what needs improving until they understand how they currently operate. Everything the organization does with its funds should be inventoried with regard to fund raising, accounting, generating financial reports, and interactions between senior management and the board. You should also document when these actions occur.
Develop board-of-director budget policies. These include noting who presents the organization's budget to the board of directors for approval, when they present, and in what format they present the budget. These policies provide guidelines on how changes to the budget are made and approved, how expenditures that exceed budgeted amounts are approved, as well as how to review monthly actual-vs.-budget reports and cash flow projections.
Make the budget process part of the strategic planning process. Budgeting provides an opportunity to link the organization's operational plans with its strategy for achieving financial success and growth. Before plunging into the budget process and assigning costs to program activities, all program and project managers should understand the organization's mission and objectives. This process will get everyone on the same page about organizational goals and how to achieve them.
Manage to the operating budget and audited financial statements. The budget process should bridge the cash budget, which most often is a modified cash-basis budget, and audited statements, which are accrual based. Frequently, management and the board look at cash budgets. Outsiders, including lenders, look at audited statements, and can get a very different picture. For example, depreciation expenses and vacation accruals can turn a $10,000 surplus on an operating budget into a $50,000 loss on an audited statement of activities.
Budget a surplus. Being around for the long term requires building reserves. Best practices include budgeting an annual surplus, even a minimal amount, to ensure that adequate resources exist to guard against unexpected shortfalls.
Project cash flow. Good business practice indicates that an organization should have three to six months of current assets (cash, accounts receivable, short term investments, etc.) on hand. This will ensure you have enough cash to meet all obligations throughout the year. It will help you manage accounts receivable, accounts payable, and the timing of budgeted expenditures.
Build temporary and permanently restricted revenue. Even though they don't affect the unrestricted column on the organization's statement of activities, restricted revenue will affect your final surplus/deficit result and will provide revenue and fundraising goals for future years.
With the nonprofit sector pumping more than $50 billion into the Massachusetts economy each year, solid financial management of nonprofit organizations is not nice to have. It's mandatory.