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Does Your Board Really Know the Numbers?

Nonprofit board members have a legal obligation to the organization’s fiscal health. Yet, many struggle to fulfill their fiduciary duties related to budgeting, finance and oversight. The culprit is often a fundamental disconnect between the nonprofit and for-profit worlds.

Board Really Know Numbers, October 2016 NFP NewsletterWhere the Disconnect Occurs
Unlike a for-profit business, no one “owns” a nonprofit. The goal is not to maximize earnings, but rather to carry out the nonprofit’s purpose or mission. Board members need to wrap their heads around some often-unfamiliar concepts such as:

  • Program accounting — Nonprofits are required to show how money is spent, rather than how much profit was earned. The organization must be able to produce reports detailing the expenditures and revenues for each of the organiza- tion’s individual programs as well as supporting and fundraising services.
  • Revenue and expense recognition — In the for-profit world, revenue is matched with expenses, and a business’s P&L reflects net income or net loss for the year. By contrast, nonprofit financial statements focus on changes in net assets. Donor promises “to give” are recorded as revenue when the promise is unconditional — without regard to when the monies are received or expended. This causes revenues to often be reported in a period before they are received or used.

Failure Is Not an Option
Ultimately, executive staff and board leadership must collaborate to make sure that board members are educated and informed regarding financial documents. Consider these ways you can help your board members fulfill their fiduciary duties:

  1. Invest in some board training. Make sure to cover the basics of reading nonprofit financial statements as part of new board member orientation (consider having existing board members also attend for a refresher). Also consider inviting your external auditors (your CPAs) to the training session and asking them to provide comments.
  2. Prepare for productive meetings. Make sure that all board members receive your nonprofit’s financial statements at least seven days before the board meeting so they have ample time for review. The most effective reports use easily read charts and graphs to present the financial information — for example, a pie chart showing your budget broken down by program.
  3. Put it in perspective. Present your financials in context by utilizing benchmarking data to show how your numbers compare to similar organizations. In the same vein, include trends that compare current financials to previous months.

It’s Your Move
Understanding your nonprofit’s finances isn’t a luxury; It’s an imperative — not just for your individual board members, but for the good of your organization and your community.

For more information on this topic, please contact our office at 401-331-0500 and ask to speak to one of our Not-for-Profit specialists.