Is Your Finance Committee up to the Task?

Sarah Widlock, CPA

When defining the responsibilities of a not-for-profit’s finance committee, scanning financial reports should be the bare minimum. Your finance committee should advise your board on your organization’s financial health. An engaged finance committee shows a commitment to the not-for-profit’s long-term sustainability. Here are some best practices to consider.

Finance committee responsibilities

Your organization’s staff size and budget will determine the exact parameters of finance committee member participation. The finance committee’s fundamental duty is to communicate with the board, so it needs to work with your staff to determine the best way to convey information the board needs for sound decision-making.

Remember, not everyone understands financial statements and related jargon. Numbers require explanation and context. Therefore, the finance committee must connect the numbers to the organization’s mission, goals and strategies.

Best practices

At a minimum, ensure your finance committee has the ability to:

1. Set Budget and Financial Planning
   Before beginning the budgeting process, the committee should identify key assumptions and initiatives that will influence the process. Members and staff must discuss internal and external factors that could affect budgets over the next several years, including your strategic plan. After approval, the committee should monitor budget variances.
2. Oversee Financial Reporting
   The committee oversees preparation and distribution of financial statements and sets expectations for your not-for-profit’s staff about the level of detail, frequency and deadlines of other financial reports. It also monitors the adequacy of financial resources and allocation toward accomplishing your not-for-profit’s mission. Simultaneously, the committee ensures that donor-restricted contributions are being met. Finally, it decides whether financial resources are sufficient to support expected program and operating expenses.
3. Develop Internal Controls
   Internal controls are essential for protecting your organization’s assets. Have your finance committee work with staff and outside experts to develop effective controls and document them. It is also up to the committee to make sure that approved controls are followed and filing deadlines are met.
4. Administer Financial Resources
   The finance committee is responsible for establishing and confirming compliance with fiscal and related policies and procedures. Approved policies should reflect your organization’s specific circumstances, such as size and life-cycle stage. The committee should take care, though, not to overstep. It must respect the line between oversight of general policies versus actual implementation and execution of specific staff processes and procedures.
5. Oversee Audits
   If your organization does not have a separate audit committee, the finance committee is also responsible for audits. The committee must engage and regularly interact with auditors, review audit reports and IRS Form 990 filings, present audited financial statements to the board and propose changes to implement any auditor recommendations.
6. Create an Appropriate Investment Policy
   Even if your organization does not have enough cash to support a separate investment portfolio, liquid funds need to be managed to maximize revenue. The finance committee needs to develop an appropriate investment policy and retain qualified investment advisors, when needed. A separate investment committee is advisable, though, for organizations with substantial investments, planned giving programs or endowments. Remember that fiduciary responsibility is not limited to finance committee members. The entire board is responsible for safeguarding your organization’s net assets.

On the road to success

An active finance committee is crucial to maintain your not-for-profit’s health and reputation. The success of your finance committee depends on effective communication between the finance committee, your board and your staff.

For more information, contact Sarah Widlock at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.

Endowment Management 101

Michelle Haines, CPA

If your not-for-profit has an endowment, you understand that it is a major responsibility. For example, organizations must adhere to certain regulations, including when it comes to spending investment returns generated from the fund. For this reason, many not-for-profits opt to have a financial professional manage their endowment investments. However, even if you have professional guidance, it is important for both your staff and board members to know the basics of endowment management.

Related Read: Is Your Not-For-Profit Organization Ready for Endowments?

Making prudent decisions

First, it is important to distinguish endowments from operating reserves. Endowments generally are designed to provide steady income while their core investments grow untouched. That steady income can be a financial safeguard in times of crisis.

A significant portion of most not-for-profit endowment assets are restricted funds. Organizations generally must conform to provisions of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Among other things, UPMIFA allows not-for-profits to include appreciation of invested funds as part of what is “spendable” in addition to realized gains, interest and dividends.

UPMIFA also provides guidance for “prudent” decisions.¹ It suggests that spending more than 7% of an endowment’s fair market value in any one year generally is not fiscally responsible; however, not all states have enacted this provision. UPMIFA specifies procedures for not-for-profits to change an endowment’s purpose — useful for those that may be dedicated to obsolete or impractical purposes.

Creating a spending policy

Within the parameters of the donor’s intentions as stated in their gift instrument, your spending policy should define how much of your endowment fund’s investment returns can be spent on operations each year. Often, this is defined as a percentage of between 4% and 7% of a rolling average of the endowment fund’s fair market value. A rolling average helps even out the ups and downs of market returns and prevents the endowment’s contribution to any one budget year from being significantly lower than contributions to other years.

However, this approach does not address whether your endowment fund will be able to maintain a similar level of funding for future operations. Also, because investment returns usually do not correspond to the inflation rates that affect your operating budget, your spending policy should be based on more than just recent returns. To factor inflation into your spending policy, you might start with a relatively conservative, inflation-free investment rate of return. Then, adjust it for inflation to arrive at a spending rate you can apply on an annual basis.

Keeping it current

If you have not done so recently, now is the time to review your organization’s endowment spending policy. Economic realities or developments within your not-for-profit may have changed since your policy’s inception. Check with your CPA or investment professional to discuss changes to your policy to meet your needs.

For more information, contact Michelle Haines at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.

1. National Conference of Commissioners on Uniform State Laws. (2008, November 8). Prudent Management of Institutional Funds Act. Prudent Management of Institutional Funds Act – Uniform Law Commission. https://www.uniformlaws.org/viewdocument/final-act-109?CommunityKey=043b9067-bc2c-46b7-8436-07c9054064a3&tab=librarydocuments