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Russ Hayward: Understanding financial polices

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Posted: Sunday, August 6, 2017 2:30 pm

Do you want to know a secret? Most nonprofit professional executives had little or no knowledge or training in financial management when starting their careers.

Most are like me, “rising through the ranks” in program related positions, learning about finance and budgeting on the job with some classes and seminars, increasing our knowledge and competence along the way. And here’s another secret: most non-profit board members are just as clueless about finances; and yet the board, along with management, has the legal and ethical responsibility to ensure the fiduciary health of the organization.

Here are some basic fiduciary responsibilities of the board of directors and its finance committee in partnership with senior management staff. First, there are a number of books and articles that describe these fiduciary responsibilities and functions, but the most succinct and clear source is BoardSource, a nonprofit management organization. Here, along with some of my observations, is what it recommends.

1. Oversee financial planning. Ensure key elements of the organization’s strategic plan are addressed in the budget before presented to the full board of directors.

2. Make sure adequate funds are available for financial management tasks. This is especially true for nonprofits where “cash is king.” Analyze cash flow needs, especially if the organization is dependent on the proceeds of large and/or seasonal fundraising events to cover costs throughout the year.

3. Ensure that assets are protected. This includes investments of reserves or endowment; this often requires a system of internal controls if this function is not carried out by separate committees.

4. Draft organizational fiscal policies. Fiscal policies serve as guidelines, and protection, for board and staff as they address all the numerous and complicated and routine questions relating to financial management. Draft and approve policies that indicate acceptable reserves, level of incurred or planned debt, board involvement in signing major purchases or financial commitments or the appropriate use of board-designated funds. There are very good financial policy templates available.

5. Anticipate financial problems. In partnership with the organization’s CEO and/or CFO, committee members analyze links between the external fiscal environment, e.g. economic downturn, fundraising competition, loss of grants and revenue generating programs, etc., as it relates to the board’s fiscal decision-making. Learn from the mistakes of other organizations and determine what your organization might do to avoid the same problem.

6. Oversee financial record keeping. Make sure financial information is reliable, on-time and helpful.

7. Help the full board understand the organization’s financial health. This isn’t always easy since most board members are not necessarily familiar with accounting and financial jargon. While the finance committee should be knowledgeable and conversant about financial concepts, develop a financial “scorecard” or “dashboard” with a limited number of key indicators about the organization’s financial health. Use graphs, not just numbers (easily done on Excel). And be sure to discuss the implications of the finance report, not just its contents. This is the best way to link financial health with the organization’s goals and objectives.

8. Ensure that all legal reporting requirements are met. This is especially true for smaller nonprofit organizations that rely heavily on volunteers to carry out significant financial functions.

9. Sustain the financial committee. Make sure that the committee responsible for recruiting and selecting new board members is securing new members with financial savvy; common sense helps too.

In addition, I highly recommend that nonprofit organizations secure an independent financial audit conducted by a certified public accountant. An independent audit results in a clear picture of an organization’s financial health; it also can uncover weakness and recommend remedies in accounting procedures. And perhaps most of all, an audit can assure current and potential donors that their contributions are being managed correctly, thus building confidence and trust in the organization itself.

In most cases, it is advisable to create an independent audit committee which includes members of the finance committee and members at large. And yes, an audit can be expensive, but given what is at stake … the trust of the community and your donors … the audit is a necessary element of the board’s fiduciary duty.

Remember this: much of your organization’s reputation depends on its financial health. Poor financial leadership can lead to decreased revenue, especially from donors, and as a mentor of mine once so eloquently said, “they ain’t buying hay for no dying horses.”

Russ Hayward is a Lodi-based nonprofit consultant with over 40 years of executive leadership experience working for United Way and the YMCA. He is a board member of the Lodi Community Foundation and serves on Lodi’s Committee on Homelessness. Russ can be contacted at russoldblue@aol.com.

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