Last Wednesday, in a snowstorm, I spent more than four hours driving the eight miles from the train station to my house.
It should have been a 15-minute trip, and I had less than a quarter of a tank of gas. As the hours ticked by, I became increasingly grateful that my car had an accurate gas gauge. And that I knew how to read it.
Which leads, believe it or not, to the subject of financial management and nonprofit financial statements.
If money is the fuel that allows nonprofits to accomplish their mission, then financial statements (especially the neglected balance sheet) are the gas gauge.
Since the board is ultimately responsible for making sure the organization doesn’t run out of gas, you’d think boards would be more attentive to the gas gauge. But boards are notorious for their distaste for reviewing financial information and their inability to interpret financial statements or to use them to make decisions.
In all fairness, it’s not all their fault. Some executive directors give boards poor information.
Often financial statements shared with boards are far too detailed for board members to absorb, they omit important benchmarking information such as a comparison to the budget or to the previous year, and they don’t include explanatory notes or a cover memo that highlight important issues and put the financials in context.
As a result, boards often do a poor job of financial oversight and may not recognize that a financial crisis is looming until the organization is about to miss a payroll.
When I’ve talked with executive directors and board members about these problems, they offer several common explanations.
Many board members are intimidated by numbers and lack confidence. Finding board members with financial-management skills can be challenging. Boards with limited financial-management bench strength often defer to the treasurer or the lone accountant on the board, assuming that they understand the finances even if no one else does.
Many nonprofits, especially organizations with budgets under $1-million, can’t afford to hire a chief financial officer who could strengthen financial management and help the board do a better job. And many executive directors don’t have a strong background in financial management and are themselves intimidated and under-confident in their financial-management skills.
All these things are true enough. Yet sometimes these conversations make me wonder whether some executive directors don’t view weak financial management as a point of pride or a badge of honor–proof that they are not bean counters or heartless corporate suits but rather warriors for social justice who don’t have the time or patience for anything that’s not core to mission.
But money is core to mission. And in the “perfect storm” operating environment of recent years, nonprofits and their boards need crystal clarity about their financial situations. Executive directors need to make strengthening financial management a priority. And boards that aren’t getting good information need to demand better.
If they don’t, they risk running out of gas.
6 Responses to It’s Time to Get Serious About Financial Management
bill__huddleston - February 4, 2011 at 10:38 am
In addition to the points made by Rick, I would add that many board members do not realize that if things get really bad for their non-profit, their responsibities and obligations, expand rather than contract.
Ron Mattock’s book, The Zone of Insolvency, does a good job of highlighting these type of pitfalls for non-profit boards.
Here’s the summary of a review I shortly after its publication:
Non-Profit Board Responsibilities Expand in Times of Economic Stress
In these uncertain economic times, one fact that many nonprofit board members may not be aware of is that if a nonprofit approaches bankruptcy, the board’s responsibility expands to include “all appropriate parties of interest” – including creditors, lease holders, employee benefits and retirement plans, etc. – not just the non-profit itself.
During such times, even non-profits that have a balance sheet that looks strong can be at risk because of “tail-end obligations” that do not appear on current financial statements. One example of this in the book is a non-profit that had a five year lease with no cancellation clause. If they shut down with three years left on the lease, the non-profit is responsible for paying the entire amount.
Regards,
Bill Huddleston
The CFC Coach
http://www.cfcfundraising.com
The Combined Federal Campaign (CFC) is the world’s largest source of unrestricted funds, and if the CFC were a foundation, it would be the 10th largest foundation in the US in terms of actual giving.
alan_s - February 4, 2011 at 12:34 pm
I have seen boards look at financials with negative unrestricted assets but a positive overall net assets balance and not bat an eye as they don’t understand that they are inadvertently borrowing restricted monies. The balance sheet is crucial to understand, and always seems to me the easiest to get your head around out of all the statements.
edwardable - February 4, 2011 at 12:47 pm
I had just completed reading the COP coverage of the financial debacle at Hillcrest Children’s Center when I cam to Rick Moyer’s excellent opinion piece on the failure of Boards to provide required fiancial oversight. Hillcrest’s situation is a “poster child” that proves Rick’s distressing point. Having a board propertly execute it’s responsibilities in financial oversight is not “rocket science”. The solution, as it is with so many other board responsibilties, is to train the board to do it’s job. If they can’t read or understand a financial statement, educate them until they can.
As I have advocated to Rick,(and anyone else who will listen) poor or disfunctional board performance has become the Achilles heal of the non-profit world. WHEN oh WHEN are we going to wake up and do something about it AND hold boards truly accountable for their performance in fulfilling their responsibilities.
Edward H. Able, FASAE
Able is a 40-year CEO of non-profits who now engages in a consulting practice serving non-profits, foundations and associations.
katherinemorrison - February 4, 2011 at 3:51 pm
One further challenge – accrual accounting, FASB etc. make it hard for board and staff to really understand the organization’s position at any given time. It takes a conscientious and patient CFO to make monthly financials truly understandable. I think financials presented in GAAP with accompanying dashboard and variance reports are best.
Katherine Morrison
Morrison Nonprofit Transitions
katebarr - February 4, 2011 at 9:19 pm
Hear, hear to your post, Rick. I would add that there are board members and financial professionals who reinforce the idea that financial information is a secretlanguage only available to a select few. This approach makes it hard for even a diligent board member to develop their skills and knowledge. At Nonprofits Assistance Fund we believe that every board member can learn the terminology and key items on financial statements without having to take an accounting class or ever hear the phrase “FASB 116 & 117″. We help board members (and directors) with very accessible resources, workshops and a webinar called Financial Clarity for Nonprofit Boards (offered on February 18th -http://bit.ly/glWpX5
Kate Barr
Executive Director
Nonprofits Assistance Fund
schammond - February 7, 2011 at 5:06 pm
Rick,
While a nonprofit may not be able to afford a full-time CFO there are many of us who operate part-time CFO practices. Over the last 20+ years I have worked for a variety of nonprofits getting their financial affairs in order and educating staff and board on how to read the financial information.
It is also critical every nonprofit have a Finance Committee comprised of people who can read financial statements and understand risk. Through these individuals the board can gradually be educated.
Susan C Hammond
Principal
scHammond Advisors