The Board of Directors is a critical governing component of any non-profit organization. Not only does it play a pivotal role in nurturing the stated mission of its organization, but it’s financially responsible for the organization that it serves, both in terms of the financial viability of any activities the organization wishes to carry out as well as in terms of an organization’s overall financial state.
The key financial responsibilities of any board of directors—and which are enforced by its treasurer—are:
- Financial planning: determining a budget
- Financial controls: keeping tabs on the money to make sure it isn’t being misused
- Financial reports: detailed records and an annual overview that reflect an organization’s financial state
The budget is an internal document that is at the center of financial planning for any organization. It establishes the planned expenditures (through various activities) as well as targeted income. Budgets should cover at least one year, but projecting future years’ budgets can also be beneficial. Once a budget has been agreed upon, the board needs to keep track of actual expenditures and income to make sure they’re aligned with what was forecasted. When it comes to financial planning, these are the questions that a board needs to continually ask themselves:
- Have we established a budget and are we keeping tabs on this budget? If there are variances between budgeted income and expenditures and actuals, is the board getting adequate explanations from staff members that explain these differences?
- What accounting method will we use—cash basis or accrual basis? Cash basis accounting recognizes and records income and expenses when they occur. In other words, an association would record income when it receives the funds and not when it’s earned. It would also record expenses at the time it pays a bill rather than when it incurred the expense. Accrual basis accounting, on the other hand, recognizes income when it’s earned, rather than when it’s received, and recognizes expenses when they’re incurred, not when the association pays the actual bill. TMG recommends accrual based accounting, as it more accurately reflectsan association’s economic reality.
- What are the financial costs of activities/programs, and are these costs justified? (Revenue versus expenses.) Remember, non-profits measure success differently than their for-profit counterparts. While the latter consider profit generation a clear marker for success, non-profits are all about honoring their fundamental missions. Therefore, even if a particular activity is not giving financial results, continuing the activity may be valid, provided it’s strongly aligned with the association’s mission.
- Do we have a healthy cash flow? Cash flow refers to the money that’s moving in and out of an association in any given period. For non-profits, key components affecting cash flow are salaries for staff members as well as any fixed overhead expenses (rent, utilities, etc.) The board of directors should look at cash flow projections to make sure that the organization always has sufficient cash to cover future obligations. This is also where reserve funds come in—money that’s readily available (liquid) to cover any unforeseen events that affect operating expenses and/or income. A reserve fund also gives an association more flexibility to take mission-related risks. Every board should have an objective of building and managing a reserve fund, as well as have a written Reserve Policy that stipulates an "adequate" operating reserve and how its operating reserves are calculated. TMG recommends a reserve fund equal to 1.5 years of operating expenses.
Also, referred to as “internal controls”, financial controls are the practices put into place to ensure that a non-profit’s money isn’t being misused. It’s incumbent on the board to stipulate and enforce an association’s financial controls. Some examples of such controls are:
- Requiring more than one signature on any checks
- Only reimbursing employees for those expenses that have been pre-approved
- Requiring that the person receiving any checks in the mail is not the same person who deposits them (also known as “segregation of duties”)
A board of directors relies on solid financial information to evaluate an association’s financial health. In addition to internal reports that aren’t intended for the public, the board of directors should oversee the preparation of an external annual financial report, which the public would have a right to see. The key elements of a non-profit’s financial report are:
- All incoming funds over a fiscal year: examples are membership dues, fundraising and sponsorships.
- All outgoing expenses: these include salaries and wages.
- All fixed operational costs: the essential costs that the association pays out every month to keep going, and include rent and utility bills.
- All flexible operational costs: these costs don’t usually occur regularly, and can include things like purchasing office equipment or new computers and printers.
- The mathematical difference between all income and all expenses (here you would add up the abovementioned costs).
Having a comprehensive financial report is critical in the case of an association undergoing an independent audit. An audit refers to an examination of an association’s financial records, performed by an independent auditor (who’s not an employee of or affiliated with the association being audited).
The board of directors of any association bears many responsibilities, and the financial ones aren’t to be undermined. By implementing some fundamental yet critical tools such as a budget, a healthy cash flow, some financial controls to prevent the abuse of funds, and detailed internal and external reports, an association is well on its way to establishing and maintaining the financial health necessary to fulfill its mission.