A Resource to Boost Nonprofit Financial and Accounting Literacy
Board members are required to exercise a duty of care, which, in part, means they must act in a reasonably prudent manner when making decisions. If they are not conversant with the organization's finances, how can they be assured their decisions are prudent? The simple answer is, they can't.
Intended as an overview for boards, management, and staff, this newly published guide, free of jargon, will help board members fulfill their fiduciary duties and better equip managers and others to better understand their organization.
Author Thomas Ittelson, a financial management consultant to nonprofits, notes that if board members do not understand the basics of accounting and financial reporting, they'll become too dependent on the top executive, diminishing their ability to provide oversight.
Consider questions with which nonprofit boards often grapple: Can we execute our strategic plan? Are our expenses in line with what we need to do? Are some expense areas rising faster than their sources of income, and, if so, why? Do we have the right checks and balances in place to prevent errors, fraud, and abuse? Are we fulfilling requirements of funders, and effectively fulfilling our mission?
The answers to these and many related questions depend on understanding the organization's finances. Nonprofits may not be profit oriented, but they have a keen interest in maintaining financial stability and, possibly, generating a surplus with which to fund new programs. And, as Ittelson observes, charitable organizations are subject to the laws of economics that apply to everyone else.
"Money is most often an organization's scarcest resource and how well money is used is the best measure of board, management, and staff performance," he writes. "The organization's financial statements document that performance."
Ittelson guides the reader through the fundamentals of nonprofit financial statements, the mechanics of nonprofit accounting, and planning, budgeting, reporting, and oversight. Think of it as an in-depth, semester-long course condensed to 215 readable pages. The inclusion of financial and accounting statements lets the reader see what they may actually look like, while accompanying text guides him/her through the various components.
"Ultimately, however, it is not enough to just learn the mechanics," according to Ittelson. "This knowledge is just a tool; it's the beginning. To be effective you must know how to use the numbers to improve your organization and its service to mission...it must act in a business-like fashion if it is to prosper."
Many nonprofits, particularly smaller ones, are often challenged to enlist new board members. There is an understandable reluctance not to overwhelm prospective directors with the full extent to which they will need to understand finances in order to advance the mission. But the topic shouldn't be avoided, and if Ittelson's book were included in a welcome package for new board members, it would help the cause all around.
Nonprofit Accounting and Financial Statements is available from Mercury Group Press.
Reviewed by Peter Lowy