Board Member Responsibility #3: Providing Proper Financial OversightApril 05, 2021
Achieving financial success depends on a well-constructed budget, proper cash management, and financial oversight. Part three of our Ten Basic Responsibilities for Non-profit Boards series dives into this responsibility.
*Editor's Note: This blog has been updated as of April 5, 2021 for accuracy and comprehensiveness.
After establishing the organization's mission and hiring a CEO, the rest of the Board's responsibilities come down to planning and monitoring. The Board should be sure that the organization is planning for success and monitoring the progress along the planned route. Remember, "A failure to plan is a plan to fail." Part three of our series continues with a deep dive into proper financial oversight.
Mission success depends on financial success
Although many believe that the divine missions of non-profit organizations assure divine intervention, the reality is that mission success is directly related to financial success. An organization in sound financial condition is not the result of luck or magic—a sound financial condition results from implementing procedures designed to maintain a financially stable organization.
However, a sound financial condition does not mean being wealthy. Small and large organizations should strive to achieve sustainability. Unfortunately, it is just as easy for a large organization to slip into financial ruin as it is a smaller organization. The only difference is the size of the problems.
Developing an annual budget is essential
The annual budget is the financial summary of significant policy decisions. It sets the organization's programmatic, personnel, and other priorities into motion. The budget is the plan that provides the bridge between the mission objectives and the programs and activities designed to achieve those objectives. The Board must ensure that the organization develops and maintains an annual budget.
Board involvement depends on the size of the organization
The Board's involvement in developing the budget details will depend on the size and capacity of the organization. However, regardless of the degree to which the Board is involved in the details, its primary job is to ask good questions and expect good answers. Why do we believe we will receive 10% more revenue from this fundraiser than we did in prior years? How will we cut utility expenses by 15%? We want to make sure the budget is a well-constructed financial plan based on assumptions and data vs. a list of hopes and dreams.
Monitoring the organization's actual financial results
After the budget and planning process is complete, the next part of providing financial oversight is to monitor the actual financial results and compare them to the budgeted goals. Analysis of the differences will help you learn what happened and determine how best to react to these variances.
When budget vs. actual differences are significant and impact future actions, it is time to revise the budget. Some people mistakenly believe that the annual budget is cast in stone and should never be modified. In 2020, the COVID-19 pandemic changed how many organizations operated and interacted with the community, causing a significant shift in the organization's financial results requiring several budget revisions. When the original budget no longer functions as the road map for operations, it is time to adjust the map to have an appropriate tool to monitor progress.
Establishing clear cash controls
In addition to the budget, there should also be clear cash controls in place. Cash management control is the necessary ingredient in day-to-day operational efficiency. Having the cash on hand to meet payroll and pay bills is essential. Organizations that constantly struggle to meet cash requirements for the next payroll get little accomplished when in survival mode. Usually, the problems that result in this situation occurred many months before running out of cash.
Providing financial oversight to the CFO
The last item I want to discuss is the Board's responsibility for providing proper financial oversight relating to the performance of the Chief Financial Officer (CFO). Our second blog of this series (Hiring a CEO) said that the CEO is the only employee reporting to the Board. The performance of the CFO is critical to the Board's financial oversight obligations. Since finances are crucial to the organization's overall success, the Board must have a working relationship with the CFO. The Board must understand the CFO – Are they a conservative budgeter or one whose view of the future is full of hope? Has the CFO been consistently correct or consistently incorrect – or consistently inconsistent? Although the CFO works for the CEO, the Board should have a close relationship with this individual and monitor their performance over time.
Questions? Contact us.
Check out our Ten Basic Responsibilities of Non-profit Boards Series.