A key fiduciary duty of a nonprofit’s board of directors is to oversee and monitor the organization’s financial health. Some financial matters may jump out at board members, such as the loss of a major funder or a successful fundraising event. But other financial factors are less flashy. Here are some to consider.

Watch for Budget Trouble Spots

Certain budget-related issues may hint at rocky financial times to come. A nonprofit with no annual operating budget is a flashing red light and suggests an undisciplined approach to fiscal matters.

Larger nonprofits should draft budgets for each program or department. Ideally, board members will see that management-proposed budgets are in line with board-developed and approved strategies.

Once a budget has been finalized, the board should compare it regularly to actual results for significant variances. Some differences are bound to happen, but should be explainable by the organization’s staff. Causes for actual operations being out of sync with a budget might be unplanned program expansion, unanticipated funding changes or economic factors beyond the organization’s control. Where necessary, the board should direct management to modify activities or institute cost-saving measures to help keep the organization on track.

Board members also should beware of overspending in one program that’s funded by another program. Watch, too, for dips into the organization’s “rainy day” fund or “reserves”, the raiding of an endowment, or unplanned borrowing. Such moves might mark the beginning of a financially unsustainable cycle.

Pinpoint Financial Statement Problems

Untimely or inconsistent financial statements that aren’t prepared using U.S. Generally Accepted Accounting Principles can lead to poor decision-making and undermine a nonprofit’s reputation. Inaccuracies or delays in financial reporting can make it difficult to obtain funding or financing and make it hard to benchmark the organization with other nonprofits in the same niche.

The board generally should receive the nonprofit’s financial statements within 30 days of the close of a period.  Delays in producing timely and reliable financial statements might be a signal of understaffing, poor internal controls, an indifference to proper accounting practices, or efforts to conceal mismanagement or a fraud. For larger nonprofits, the board or audit committee should also insist on annual audits and expect to participate in the selection of the audit firm. Members of the responsible group, such as an audit committee, should communicate directly with the auditors before and during the process. All board members should have the opportunity to review the audited financial statements and ask questions of the auditors as well.

Listen to Donor Concerns

If the board starts to hear from long-standing, passionate supporters about their concerns over the organization’s finances, that’s a very bad sign. What are they seeing or hearing that prompts their concerns?

The board also should note when development staff begin reaching out to historically major donors outside of the usual fundraising cycle. These efforts could mean the organization is scrambling for cash and hoping its most dependable donors can fill the gaps.

Keep an Eye Out for Power Grabs

It’s understandable that board members who have full-time jobs and other responsibilities might cede some of their responsibilities to a trusted executive director. However, it may be risky and result in the executive director having too much control or power.  The board should think about changes if the executive director:

  • Insists on choosing the organization’s auditor,
  • Adds board members who are friends, or
  • Makes strategic decisions without board input and guidance.

Additionally, an executive director should follow the organization’s policies, such as expense limits and disbursement approvals.  Going outside of the budget or policy guidelines should require board approval.

A Special Role

Board members have a special role to play when it comes to a nonprofit’s financial well-being. Make sure that you understand the financial information you’re given from month to month. Don’t be afraid to ask questions and check “facts” and figures that don’t make sense to you. Doeren Mayhew’s nonprofit advisors are here to help you gain a better understanding of your organization’s financial health. Contact us today!