When most board members see an organization’s financial statements, their eyes glaze over. However, one of the major duties of a board is a fiduciary one. According to Jeremy Barlow in his blog, “Non-Profit Legal Responsibilities,” on Board Effect (August 12, 2016), a “non-profit board oversees the organization’s assets and makes sure that the non-profit is on sound financial footing.” This is part of the board’s duty of care, and should not be taken lightly.
How many times have we heard that an organization has been defrauded because the leaders are unaware of the finances of the organization, or that the organization is close to closing because it doesn’t have enough funds to operate (a situation probably ongoing for years)?
How do you walk the tightrope with board members so they fully understand their fiduciary responsibility (and the financial statements) yet do not end up micromanaging the organization.
Overall, boards want clarity in presentation of financial statements – they aren’t financial managers or accountants (unless you run an association of financial managers or accountants). To this day, what one board member said to me still resonates with me, “Just tell me how much money we have in the bank, whether we have enough to keep operating, and are we doing better or worse than previous years.”
So, what can you do to help boards fulfill their fiduciary duty and understand the financial statements?
- Present financial statements in a clear and easy-to-read format. Having at hand a lot of the back-up details for the financials is good in case there are questions raised, but too much detail (and often, too much complicated detail) makes it difficult for board members to not “get into the weeds” because the financials are so complex.
- Use dashboards to show if you are underperforming, over-performing, or performing at the right level. These dashboards not only should include financial information but information (known as Key Performance Indicators) such as number of members and membership revenue, number of conference attendees and conference revenue, etc.
- Don’t use a lot of acronyms and accounting jargon. For example, most board members don’t know "GAAP" stands for Generally Accepted Accounting Principles and "KPI" stands for Key Performance Indicators.
- Use more pie and bar charts in the financials. For example, a pie chart will help board members better understand the various sources of income and expenses that will lengthy financial statement.
- Have regular finance committee meetings. However, make sure that by doing so, you don’t put forth the message that only the finance committee (or the Treasurer) needs to care about the financial well-being of the organization. Every board member has a fiduciary responsibility.
- Make sure board members are shown the type of financial reports they receive and again emphasize their “broader picture” fiduciary responsibility they have as early as their board orientation.
- You may also enlist your auditor to help them understand their fiduciary duty. For example, it is a good idea to have the auditor attend a board meeting to present the audit. Most auditors will be able to explain things in a way board members can understand.
- Develop a budget each year, and have monthly reports showing how well the organization is doing compared to its initial budget. And try to make sure the organization “lives within its budget.”
- Make sure there is always a treasurer’s report or financial update at every board meeting.
- Have a grants policy. That is, make sure there is a policy for clearing grants through the association executive director and office. Often board members may have contacts with funders (which is good) but if they develop projects without the input of the staff, they often underestimate the real costs of both staff and supplies.
If you do all of the above then you’ll be able to answer the questions asked by one of my board members – how much money do we have in the bank, do we have enough to keep operating, and are we doing better or worse than previously? Moreover, you will know that your board is taking its fiduciary duty seriously.