Responsibility #3: Providing Proper Financial OversightJune 13, 2013
Achieving financial success with a well constructed budget, proper cash management and financial oversight.
After establishing the organization’s mission and hiring a CEO, the rest of the Board’s basic responsibilities come down to planning and monitoring. The Board should be sure that the organization is planning for success (remember, failure to plan is planning to fail), and monitoring the progress along the planned route.
Although many believe that the divine missions of not-for-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 luck or magic. Rather a sound financial condition is the result of implementing a recipe of tasks designed to achieve a sound financial condition. This is more science than art.
A sound financial condition does not mean being wealthy. Small organizations as well as large organizations should strive to achieve a sound financial condition. 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 financial problems.
The Board must insist that the organization develop an annual budget. The annual budget is actually the summary of significant policy decisions – programs, personnel, capital purchases, etc. The annual budget sets into motion the organization’s programmatic, personnel and other priorities. The budget is the plan that provided the bridge between the mission objectives and the programs and activities designed to achieve those objectives.
The degree to which the Board is involved in the development of 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 demand good answers. Why do we believe we will receive 10% more revenue from this fund raiser than we did in prior years? How will we cut travel expenses by 15%? There is a significant difference between a well constructed budget and a list of hopes and dreams.
There is no magic here. We are all experienced in planning and budgeting. If your goal is to lose 15 pounds next year, that is your mission. The plan includes changing eating habits and exercise. The budget is to have fish once a week and one other meatless meal each week and get 2 hours of rigorous exercise each week. Establishing the financial cost of these activities and diet changes is the financial budget part of the plan. Only when this is complete have you established a plan to achieve your goal.
After the budget and planning process, the next part of providing financial oversight is to monitor the organization’s actual financial results and compare the actual goals with the budgeted goals. Variances must be analyzed to learn what happened and to determine how best to react to these variances.
When budget vs. actual variances are significant and future actions must be modified from what was originally budgeted, it is time to revise the budget. Some people mistakenly believe that the annual budget is cast in stone and should never be modified. When the original budget no longer serves as the road map to how you hope to operate, it is time to draw up a new road map so that the new map will be the appropriate tool to monitor your progress.
In addition to the budget, there should also be clear cash controls in place. Cash is king in the not-for-profit organization just as it is in every business and even in our personal lives. Having the cash on hand to meet payroll and pay bills is essential. Cash management control is the necessary ingredient in day-to-day operational efficiency. Organizations that begin to notice that they may not have the cash to meet the next payroll get little accomplished subsequent to that realization. Usually the problems that result in this situation occurred many months prior to running out of cash.
The last ingredient that I want to discuss is the Board’s responsibility for providing proper financial oversight relating to the performance of the CFO. Although in the second blog (Hiring a CEO) of this series, I 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. Because finances are so important to the organization’s overall success, it is critical that the Board have a working relationship with the CFO. The Board must understand the CFO – is that person an optimist or a pessimist? 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 be able to monitor their performance over time.
Read more on not-for-profit boards:
Board Development Series
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