Signs of Financial Trouble for Board Members
Charles J. Burke
A key fiduciary duty of a not-for-profit’s board of directors is to oversee and monitor the organization’s financial health. Some financial matters may jump out at board members, such as the loss of a major funder or a successful fundraising event. But other financial factors are less flashy. Here are some to consider.
Watch for Budget Trouble Spots
Certain budget-related issues, for example, hint at rocky financial times to come. A not-for-profit with no budget is a flashing red light — the lack of an annual operating budget suggests an undisciplined approach to fiscal matters.
Larger not-for-profits should draft budgets for each program or department. Ideally, board members will see that management-proposed budgets are in line with board-developed and approved strategies.
Once a budget has been okayed, the board should compare it to actual results for unexplained variances. Some discrepancies are bound to happen, but staff must explain significant differences. There may be a reasonable explanation, such as program expansion, funding changes or economic factors beyond the organization’s control. Where necessary, the board should direct management to modify activities to mitigate negative variances. Instituting cost-saving measures may be in order.
Board members also should beware of overspending in one program that is funded by another. Watch, too, for dips into the organization’s “rainy day” fund (its “reserves”), the raiding of an endowment or unplanned borrowing. Such moves might mark the beginning of a financially unsustainable cycle.
Pinpoint Financial Statement Problems
Untimely, inconsistent financial statements — or statements that are not prepared using U.S. Generally Accepted Accounting Principles (GAAP) — can lead to poor decision-making and undermine a not-for-profit’s reputation. They also can make it difficult to obtain funding or financing if deemed necessary.
Financial statements not prepared monthly and in accordance with GAAP, or another comprehensive basis of accounting, can be unreliable. They could signal understaffing, poor internal controls, an indifference to proper accounting practices or efforts to conceal mismanagement or fraud. And the statements are likely difficult to compare to other not-for-profits in the same niche. The board generally should receive the not-for-profit’s financial statements within 30 days of the close of a period.
For larger not-for-profits, the board or audit committee should also insist on annual audits and expect to select the audit firm. Members of the responsible group, such as an audit committee, should communicate directly with auditors before and during the process. All board members should have the opportunity to review and question the audit report.
Listen to Donor Concerns
If the board starts to hear from long-standing, passionate supporters who are harboring doubts about the organization’s finances, that is a very bad sign. What are they seeing or hearing that prompts their concerns?
The board also should note when development staff begin reaching out to historically major donors outside of the usual fundraising cycle. These contacts could mean the organization is scrambling for cash, and hoping its most dependable donors can fill the gaps.
Keep an Eye Out for Power Grabs
It is understandable that board members who have full-time jobs and other responsibilities might cede some of their responsibilities to a trusted executive director. However, it may be risky.
So, what are the signs of an executive director who wields too much power? The board should think about changes if the executive director:
- Insists on choosing the organization’s auditor;
- Adds board members who are friends; or
- Makes strategic decisions without board input and guidance.
Additionally, an executive director should not be allowed to ignore expense limits. Going outside of the budget or policy guidelines should require board approval.
A Special Role
Board members have a special role to play when it comes to an organization’s financial well-being. Make sure that you understand the financial information you are given from month to month. Do not be afraid to ask questions. Lastly, check “facts” and figures that do not make sense to you.
For more information, contact Charlie Burke at firstname.lastname@example.org or 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.