Do you and your fellow board members know how to read and understand a non-profit organization’s financial statements?
You should, as it’s a very important function of board leadership. To help clarify why it’s so important, just Google “board financials” or “understanding board financials”. Among the many links, you’ll likely find the following.
Steven Berger, in his Learning to Read Financial Statements, share the following.
Financial statements summarize an organization’s financial position – at a given moment in time as well as over longer periods (monthly, year-to-date, quarterly, annually). They should reflect any variances between the actual operating results and the budgeted goals that were previously approved by the board.
All board members need to have a basic understanding of the most important elements of a financial statement. They need to know why these elements are important and what actions they should take if these elements are inconsistent with board wishes or out of compliance with generally accepted accounting standards.
We also found a set of questions, as created by Tom McLaughlin, very enlightening. Here are his 20 QUESTIONS BOARD MEMBERS SHOULD ASK, as found on the Board Source website.
Board members can’t provide financial oversight if they don’t know what to look for. The following questions address some of the most important issues board members should raise when reviewing the organization’s finances.
1. Is our financial plan consistent with our strategic plan?
SUFFICIENT AVAILABLE CASH
2. Is our cash flow projected to be adequate?
3. Are our cash-flow projections reasonable, objective, and not overly optimistic?
4. Do we have sufficient reserves?
5. Has the board adopted a formal policy for the establishment of reserves?
MEETING THE BUDGET
6. Are we regularly comparing our financial activity with what we have budgeted?
7. What procedures do we use to make sure that the differences between what was budgeted and what actually happened are being appropriately addressed?
PROPRIETY OF EXPENDITURES
8. Does the board provide oversight of contractual agreements to ensure that the organization’s exempt status will not be questioned or impaired?
9. Does the board provide for internal controls over expenditures?
10. Are we fulfilling our tax-exempt purpose as granted by the IRS?
11. Do we have the appropriate checks and balances necessary to prevent errors, fraud, and abuse?
12. Are we alert to the possibility of fraud within our organization and are we taking safeguards to try to prevent fraudulent activities?
13. Do we have an external audit?
14. Does our annual audit have an unqualified (“clean”) opinion? If not, why not, and what is being done about it?
15. Is our financial staff providing us with accurate and timely financial statements that allow us to understand the financial state of the organization?
16. Do we regularly review the IRS Form 990? Does it accurately represent our organization?
SIGNS OF FINANCIAL DISTRESS
17. Are our key sources of income rising or falling? If they are falling, what are we doing about it?
18. Are our key expenses, especially salaries and benefits, under control?
19. When was the last time our investment policy was reviewed?
20. Are we satisfied with the performance of our investments, given the level of risk appropriate for these funds?
NPcatalyst designed its HealthCheck tool, which also designs a best practices solutions guide for participating organizations, to help strengthen charities. Many topics, like reading financial statements, are analyzed with HealthCheck. Click here to learn more and register for HealthCheck.