Board of directors — Teach them well: Financial literacy is key

Your board is responsible for reviewing your nonprofit’s financial results so it can make sound decisions. But not every board member arrives at your organization with a financial background. Here are some suggestions for relaying some of the most vital information they need to know.

Communicating the balance sheet

A statement of financial position shows an organization’s assets (cash, accounts receivable, and property and equipment), liabilities (accounts payable and long-term debt) and net assets (unrestricted, temporarily restricted and permanently restricted resources). Long lists of numbers can have a dizzying effect on readers. So instead of using a numerical format, employ graphs and pie charts to relay the information.

Using a pie chart to depict assets will show your board at a glance what portion of total assets can quickly be converted to cash (cash equivalents and investments) vs. the portion that cannot (property and equipment). Or, say, you create a pie chart that shows how your annual event was funded last year: money from attendees, sponsors and general funds. This tool can help a board make quicker and better-informed decisions — in this case, guiding them in setting or readjusting their funding expectations this year.

The bar chart in this article, for example, illustrates one nonprofit’s breakdown of total assets. At a glance, anyone can see that the organization’s cash is the largest part of its total assets and it has a much smaller percentage invested in works of art.

Talking about income statements

A statement of activities generally starts with total revenues and support. Then management and general, program and fundraising expenses are deducted to arrive at the overall change in net assets. A bar chart is a good way to present this information: It can compare in a single image current revenues and expenses with those of previous periods. By adjusting the bar graphs on, say, a monthly basis, nonfinancial board members will be able to compare revenues and expenses to the budget on a continuing basis.

Your annual budget assumes a particular level of revenues and support. If you don’t obtain certain grants — or if you take in less for program services than anticipated — your board will need to revisit anticipated expenses and adjust figures accordingly. A graphic image, such as a bar graph or pie chart, is one way to call “heads-up” quickly.

Tell a story via ratios

Because of the downturned economy, many organizations have experienced cuts in funding and other contributions. In response, they’ve had to reduce costs. Comparing the following ratios for the current year to the prior year can reveal whether these costs have been cut effectively:

  • Management and general costs to total support and revenues,
  • Program services to total support and revenues, and
  • Fundraising expenses to total support and revenues.

These ratios allow your board to see if the organization’s costs and revenues are in line with its expectations, as expressed, for example, in the budget. Let’s say that your management and general costs are $100,000 for the coming year and the total support and revenue for the organization is $1 million. You’d have a highly impressive ratio of 1:10 — 10% of every dollar earned is spent on administrative costs, with the remaining 90% available to fund programs.

Need help?

Other reports can also be useful. For example, a cash flow analysis can be particularly valuable when an organization is in a cash crunch. Your trusted Hood & Strong advisor can assist you in selecting other information of value to present to your board. He or she also may be able to suggest formats that will help you best make your points to your board.