November 2014 Meeting: How to Get Your Board “Onboard” with Non-Profit Finances
Typically most nonprofit board members do not have a background in finance and those who do usually come from the for-profit world. This puts nonprofit CFOs in the position of having to explain nonprofit financial statements in terms of revenue/asset restrictions and give context to financial analysis for our sector. Issues often arise with board members having a different understanding of budgeting, cash flows, and revenue timing. Stephanie O’Leary, Senior Consultant at Accounting Management Solutions Inc., gave a presentation about how to get your Board “onboard” with nonprofit financial statements. Her presentation focused on: How we, as CFOs, can train our board members on how nonprofit financial statements work; highlighting some best practices to help board members know how to provide proper financial oversight; and providing necessary tools for board members on how to measure organizational success.
First, the CFO should make the Board familiar with nonprofit financial terminology and concepts. The Board needs to understand the mission and the structure of the organization before they can understand the financial statements. These concepts include the revenue cycle and where the revenue comes from, cash, accounts receivable, accounts payable, the fiscal year, and the fact that equity is much different for nonprofits. Board members should be made aware of what reporting requirements the agency has to adhere to and the annual federal and state audits that are required. Board members should be familiar with the different components of the financial statements and their purposes. The CFO should review the Statement of Financial Position, the Statement of Activities, the Statement of Functional Expenses, the Balance Sheet, and the Profit and Loss/Income Statement with the board. It is very important to show them a Budget to Actual report on a monthly basis and be prepared to explain monthly fluctuations.
CFOs should be prepared to explain to the board what an annual loss signifies and why it happens. It might not be ideal, but the bottom line sometimes fluctuates from year to year based on many factors. They also need to be able to distinguish between operating revenue and Total revenue. If annual losses are a recurring fact, then the board needs to be aware of this and plan accordingly. The purpose of a nonprofit is not to earn a profit, but it is to further its mission and meet its annual goals and objectives. Signs of financial stability are that the organization is able to stay out of debt, is able to fund its current programs, and its current assets exceed its current liabilities. The Board should be able to look at the revenue and cost structure of the different programs to determine if they are sustainable. One challenge that The CFO will have to take on is to explain to the board the concepts of temporary restricted revenue vs. unrestricted revenue; along with the three different asset classes in general.
Best practices for reporting to the board should include the following:
- The reports should be easy to understand
- They should be linked to the agency’s mission
- They should show cash inflows and outflows
- They should include certain key performance indicators that provide meaningful information.
- Certain ratios are useful, such as the Current Ratio (current revenue over current liabilities), the Debt to Equity ratio, and the Savings Indicator (SI = Revenue – Expense/Total Expense.
Finally, the CFO should guide the Board on questions that they should be focusing on: Can the organization pay its bills, will revenue cover expenses, are we collecting accounts receivables, are we paying our vendors and employees on time, are we managing to budget, what is the risk involved with our revenue mix, and are adjust expenses according to revenue? And, do your financial management and results advance the agency’s mission and are you planning for the future?