Increase Your Financial Knowledge

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.

Statement of Financial Position

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:

Unrestricted net assets are free from donor-imposed stipulations

Temporarily restricted net assets are subject to donor-imposed stipulations that can be removed with the passage of time or circumstances. For example, let’s say a donor gives $10,000, with half earmarked for usage in 2005 and half in 2006. The $10,000 would be recorded as temporarily restricted revenue in the year in which the organization received the donor’s unconditional promise to give the donation. It remains a temporarily restricted net asset until the organization reclassifies the donation with the expiration of the time restriction

Permanently restricted net assets, also called endowments, are subject to lasting restrictions by the donor who mandates that the principal be permanently restricted or “held in perpetuity.” Income may or may not be restricted, based on the donor’s intent.

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.

Statement of Activities

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.

Educate the Board

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:

Insist on a strong orientation process

It might involve interactions between new members and the chief executive, head financial officer, auditors and finance committee chairperson. It may be appropriate to have two levels of orientation – one for regular board members and one for finance committee members.

Ask for financial overview that includes a memorandum of operations that highlights key analyses and trends.

Include board members in meetings with auditors to increase their financial acumen and learn more about the organization from both a financial and internal control standpoint.

Ensure that at least one member of the financial committee is an expert in nonprofit accounting.

Work Together to Stay Informed

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.

Please contact Feeley & Driscoll's Boston Accounting team by Email or call 1 (888) 875-9770 to explore ways to grow your business.

related links