Current nonprofit sector research and recommendations for effective day-to-day practice from ASU faculty, staff, students, and the nonprofit and philanthropic community.
This question was recently posed to the ASU Lodestar Center’s “Ask a Nonprofit Specialist”:
Every time the financial report is made at my organization’s Board meeting, the members seem to either fixate on a number that is not especially meaningful or the opposite: their eyes glaze over in boredom. How can I make the reports more meaningful? One member suggested we use a dashboard to report our finances? What do you suggest?
Engaging members of a nonprofit Board of Directors in the organization’s financial affairs can be challenging, given the diverse skills and expertise Board members bring to the work. This Board member’s experience is very common. It’s not easy to report on financial statements in an engaging fashion. However, since financial accountability is one of the most significant legal and ethical responsibilities for nonprofit Boards of Directors, effectively engaging the Board in financial matters is critical. Consider the following background information to improve your organization’s financial reporting and the Board’s engagement in your organization’s financial affairs.
Board Financial Responsibility
A nonprofit Board of Directors has 2 essential financial responsibilities:
- Ensure assets are protected and used to support the organization’s charitable purpose in compliance with regulations and standards.
- Make certain the organization has sufficient resources to fulfill the organizational mission, otherwise known as fundraising and resource development.
Understanding Financial Statements
The detailed review of financial statements is often delegated to a Board Finance Committee, but every member of the Board should be able to interpret financial statement basics. Training for members without financial expertise is essential for any effective Board of Directors.
An organization’s budget, financial statements and summary reports to Boards of Directors should all do the following:
- Set expectations (budget and/or prior year experience, plus acceptable variations to
- Compare actual activity to expectations (comparison of budget/prior year to actual);
- Present a picture of the financial health of the organization.
At their most basic level, financial reports should enable Boards of Directors to determine if the organization is on course to meet the plan for implementing mission through programs and services. If not on course, the reports lend guidance to changing plans as necessary.
The numbers in financial statements are always relative to other numbers, and it is this relativity that gives the numbers meaning. Through a comparison of budget and prior year to actual, the Board should be able to answer the following questions:
- Does the organization have enough cash and receivables to meet our immediate and longer term cash and resource needs as defined by our budget?
- What is the trend of revenue, expense and other activities? How do these trends compare to expectations?
- Are changes necessary to accommodate changes?
- Are funds being generated and spent in alignment with internal and external expectations, restrictions and legal requirements?
- What is the overall financial health of our organization?
Focus Attention on Critical Factors by Using Ratios, Dashboards and Other Strategies
Nonprofit organizations come in all shapes and sizes—and with different challenges. Many ratios and other information can be derived from financial documents that are useful to interpretation. Some are critical to every organization and others are more particular to individual situations.
The Nonprofits Assistance Fund has a great resource that describes 14 different types of financial ratios. One of the most well known is the function expense ratio that illustrates administrative and fundraising expenses relative to program expenses. Other ratios include:
- Sources of revenue – useful to determine and monitor over and under reliance of different sources of revenue;
- Cost per unit of service – helpful in measuring efficiency of service delivery;
- Months of Liquid Net Assets - essential to determining the adequacy of liquid assets needed to cover upcoming expenses;
- Personnel Costs – monitors personnel costs relative to the budget as a whole, expectations and past experience.
A financial dashboard is a visual representation of your financial standing. Like the dashboard of a car, a financial dashboard signals your status relative to expectations (i.e. you have half a tank of gas). The key to effectively using a dashboard is isolating the essential metrics aligned with measures of expectations. Check out Blue Avocado’s great explanation and illustrations of dashboards in the nonprofit sector.
Simplify without Compromise
Together with your Board, develop transparent strategies for focusing on agreed upon financial metrics, based on well defined expectations that reflect your organization’s unique needs. Limit the metrics to the most critical factors— those that truly reflect the challenges and opportunities for your organization.
Develop reporting strategies that focus attention on these metrics and presented in a fashion that suits your organization. Try to limit detail without excluding essential information. Some organizations prefer all numbers, some like the visual presentation of a dashboard report, while others prefer a narrative report.
The Lodestar Center’s Nonprofit Management Institute offers great training for nonprofit professionals and volunteers in its Financial Management classes, with courses later this month in Tucson and in July in Tempe. Check out our Frequently Asked Questions section on our webpage for information on financial management and other nonprofit management issues. You are also welcome to pose your own question to the Nonprofit Expert.
At age 23, Anne Byrne was the founding executive director of Denver’s rape crisis center, an organization that continues to flourish today, over 28 years later. Byrne went on to build a nationally recognized, multi-site summer and after school tutoring program for inner city youth. With 25 years of experience as an executive director of emerging nonprofit organizations, Byrne brings valuable expertise and perspective to the ASU Lodestar Center's "Ask the Nonprofit Specialists."
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Click here to read William A. Brown's "Research Friday: Executive Directors’ Top Seven Roles for their Boards of Directors."