Board members have a fiduciary responsibility to their organizations. So even if they aren’t financial experts – and most are not, nor are they expected to be – they must have a working knowledge of financial statements. In light of the push for greater oversight and accountability in the nonprofit sector, this is more important than ever.
Most nonprofits have a finance committee charged with reviewing financial statements in detail and reporting on them to the full board. This committee also is typically charged with evaluating a wider array of financial information than is presented to most board members. Nonetheless, all board members need a basic understanding of the key financial documents that nonprofits are required to issue.
The statement of financial position is the equivalent of a balance sheet in the corporate world. It presents the organization’s assets, liabilities, and net assets. The net assets are the difference between what you own and what you owe; in other words, it is your cumulative financial value.
Net assets are further broken down as follows:
You may gauge the financial health of your nonprofit by evaluating the “net assets unrestricted” line. If it’s close to zero, that signals trouble. Even worse is a number in parentheses, meaning that your organization is running a deficit.
Conversely, a large number is obviously a good sign, although you’ll still want to monitor this figure carefully. If you see it steadily decreasing, this suggests there are persistent problems somewhere in the organization that need the board’s attention.
The statement of activities, known as an income statement in the for-profit world, reports revenues, expenses and the resulting change in net assets for a specified time. Revenue sources are identified, and expenses are broken down by type or progam.
The difference between total expenses vs. revenues is your change in net assets – the equivalent of net income in a business. This is another number the board will want to closely track.
Nonprofits also are required to issue a statement of cash flows, which reports how the organization’s cash position has changed during the year. This is a required statement for the audit, which may not be one that all board members see on a regular basis.
Board members must take the initiative to understand financial statements. They should become familiar with each line item and develop a sense of what your organization’s goals are for each item. Besides simply asking questions when something isn’t clear, here are other ways board members can increase their knowledge:
Boards and the organizations they serve should work together to ensure board members have a good grasp of financial concepts. Without a clear understanding of how their organizations are performing financially, boards will find it difficult to effectively carry out their governance role.