What you should know about nonprofit finances

The most important responsibility of a board of directors is managing the nonprofit by making good, sound business decisions, which help the nonprofit continue to stay in business and serve its charitable purpose.

You have accepted an invitation to be on a local nonprofit board of directors, and there’s an initial board meeting next week. Your skill sets closely align with the programs the nonprofit provides to the community it serves. Does that mean the only part of the board meeting you need to be involved in is about the programs? Can you sleep through the rest of the meeting? Definitely not!

The most important responsibility of a board of directors is managing the nonprofit by making good, sound business decisions, which help the nonprofit continue to stay in business and serve its charitable purpose.

These decisions include having a strategic plan to help grow the business, creating procedures and policies to help keep the nonprofit in business, and discussing plans on how to continually fund the nonprofit and serve its community. These important steps need to be presented, discussed and updated with the board regularly. Every board member is responsible for these matters.

One of the basic reports presented to the board at each meeting should be current financial statements showing the results of the nonprofit’s activities. Most new board members have no experience with financial statements and are lost when it comes to the terminology and format of financial statements for a nonprofit.

So, let’s review what you need to know when you serve on a nonprofit board.

Statement of financial position

A for-profit has a balance sheet. For nonprofits, it’s a statement of financial position and it presents many of the same categories as a balance sheet, such as assets and liabilities.

The balance sheet has a classification called owner’s equity which shows what amount would be shared by the owners, if the business closed. Nonprofits are run by its board, officers and staff and do not have owners. This section is called net assets. A board member should be aware of what assets a nonprofit has and whether they are sufficient to meet its needs.

Statement of activities

This statement in a for-profit business is called an income statement and shows the company’s revenues, expenses, gains and losses. Nonprofits list their revenues minus their expenses on a statement of activities. Normally, the revenue and expenses are grouped into classifications called permanently restricted, temporarily restricted or unrestricted.

Revenue for a nonprofit is typically made up of donations and grants, some of which may be restricted in their use. Grants may have a self-contained budget that restricts what the funds can be used for, the amounts that can be used and the time periods in which they can be used.

Cash flows

A nonprofit will use either a cash flow forecast or a budget vs. actual statement to keep track of inflows and outflows of funds. If the nonprofit has restricted funds, those amounts should be separated from the regular cash so the board can tell if it has a cash flow problem.

If restricted funds are not separate, the board might think that the nonprofit has a lot of cash to spend and could make incorrect decisions.

Ask for help

If you are new to the organization, ask for some time with the executive director, treasurer or bookkeeper to learn how to read the financial statements. Look at prior year financials and compare them to this year. Get comfortable with where the money is coming from and where it is going. Ask questions until you are comfortable.

Board meetings

Besides reviewing and asking questions about the numbers on the above financial statements, the board should be looking at fundraising, grant proposals, budgeting, and auditor’s reports, if required.

Red flags to look for

If you are new to a board, there are things you should be looking for. Here are some things that should cause concern about the health of the organization, and how it is being run.

• Lack of financial statements being presented to the board or statements that are three or four months old. Occasionally that might happen, but it shouldn’t happen every month.
• Not getting answers on financial questions from the executive director or staff even if the questions are asked repeatedly.
• Several years of revenue going down. What has been done to address the downturn?
• Unusual large expenses on the Statement of Activities or miscellaneous items that don’t explicitly tell you what they represent.
• Financial statements that look like for-profit statements produced from a general accounting program or formulated in excel.
• Asking questions can help you decide if you can help the organization grow or if it is time for you to move on because of the red flags you discovered.

Remember that serving on a nonprofit board is not an honor or compliment. It is hard work and you do have potential exposure to litigation. Make sure you understand the financial statements to minimize that risk. Then you can enjoy being of service to your community.

By MARCIA CAMPBELL | Contributing columnist with THE PRESS ENTERPRISE
PUBLISHED: December 20, 2019

Marcia L. Campbell has worked as a CPA for over 25 years specializing in seniors, trusts, estates, court accountings, and probate litigation support. You can reach her at Marcia@MCampbellCPA.com