By Kathy Grogan, Partner-in-Charge, Not-for-Profit Service Group
Ensuring the fiscal health of your organization is one of the most critical responsibilities of serving on a nonprofit board. As many organizations approach the end of their fiscal year, here’s what you need to know – and the right questions to ask – about your nonprofit’s finances.
1. Financial Statements. Do you receive and review the organization’s financial statements on a monthly or quarterly basis? While a detailed review of financial statements generally occurs at the Finance Committee level, a review should be part of every board meeting.
Key items to receive and review: The full set of financial statements, including the statement of financial position (the balance sheet), along with the statement of activities and changes in net assets (the income statement). An explanation of significant actual-to-budget variances should accompany the statements.
In reviewing the financial statements, be aware of the following:
· Are there any concerns about the collection of receivables?
· Have there been any withdrawals from the investment account, and were they planned?
· Are you properly monitoring the use of restricted funds?
· Are all known expenses reflected ?
Importantly, the CFO or highest-ranking in-house employee responsible for finances should be present at every board meeting to answer inquiries. Many organizations also like to present charts, which are fine as a supplement but should not replace financial statements.
2. Audits. Have you received and reviewed the audited financial statements for the organization’s prior fiscal year? If so, was there a management letter issued, and has action been taken on the auditors’ recommendations?
3. Compliance. Have all compliance filings been made with state and federal agencies, and are they accurate? Board members are supposed to have access to the IRS Form 990 (Return of Organization Exempt from Income Tax). It is important to review the 990, which is available to the public, and look at the compensation of the CEO, CFO and other key employees. The Board should also validate that your nonprofit adheres to all legal requirements affecting tax exempt organizations, such as restrictions on political activities and the reporting of special event income.
4. Budgeting. Is your new fiscal year budget ready for approval, and do you understand its opportunities and risks? Is proper funding secured for both existing and new programs? Are they any significant changes or projections noted in donor behavior? It’s vital to understand the assumptions behind the budget, discern the timing of revenues and expenses, and monitor performance against it throughout the year.
5. Internal Controls. Are strong internal controls in place to prevent fraud and mismanagement? Have there been any questionable or unusual expenses, such as high travel, consulting or “miscellaneous” costs? Make sure you understand how the organization segregates financial duties and responsibilities, its expense reimbursement procedures, and conflict of interest policy.
6. Evaluations. Is your nonprofit’s executive compensation in line with comparable institutions? On an annual basis, the Executive Committee should be reviewing the performance and salary of the CEO, CFO and other c-suite executives, and the board treasurer should regularly review any internal reimbursements, including credit card usage.
7. Insurance. The board needs to understand the organization’s insurance coverages and how risks are protected. What type of coverages are afforded in the Officers and Directors policy? Are liability and property coverages sufficient to protect the organization and its assets in the event of lawsuits, accidents, cyberattacks, or disasters? It’s a good idea to have the organization’s insurance broker explain coverages to the Finance and/or Audit/Risk Committees on an annual basis.
8. Training. Board members often unintentionally rely on fellow members with financial expertise, but sometimes even they may not have the full picture of financial reporting. It’s okay to ask questions that may seem obvious, as all board members should be able to read and interpret financial statements. Consider adding a board orientation and training by your CFO or auditor to put everyone on a level playing field.
9. Red flags. Even if your nonprofit appears to look good on paper, several issues can jeopardize ongoing operations. Financial red flags like these can indicate deeper issues such as mismanagement, fraud, or regulatory noncompliance:
· Are there sufficient cash reserves in place to weather an economic downturn or the loss of a major donor?
· Are receivables collected and recorded in a timely manner?
· Have any restricted funds been tapped for operating or other expenses?
· Is the organization’s investment portfolio adequately dispersed?
Hood & Strong has one of the nation’s largest practice areas devoted exclusively to the financial needs of the nonprofit sector. We encourage you to contact the experts in our Not-for-Profit Service Group for more information on the importance of board members’ financial understanding and oversight. By staying informed, engaged, and asking the right questions, you are helping to ensure transparency, accountability, and the long-term mission-driven success of your organization.
