Understand the tenets of sound financial leadership and the role of the board of directorsThe board of directors or trustees are the guardians of your nonprofit's assets, bearing ultimate responsibility for your nonprofit's finances.
Good financial leadership from the board means managing material assets — money and property — responsibly. It also means being good stewards of those assets that can't be quantified, such as your organization's reputation and goodwill.
What are the financial responsibilities of the board?
The National Council of Nonprofits describes the board's financial role as offering foresight, oversight and insight. The board exercises those responsibilities by monitoring and investigating every aspect of a nonprofit's finances.
The U.K.'s Charity Commission states that a trustee must act responsibly, reasonably and honestly. In managing a charity's resources, trustees must:
- Make sure the charity's assets are used only to support or carry out its purposes
- Avoid exposing the charity's assets, beneficiaries or reputation to undue risk
- Not over-commit the charity
- Take special care when investing or borrowing
- Comply with any restrictions on spending funds or selling land
While managers and executives are responsible for day-to-day financial operations of a nonprofit, the board maintains big-picture financial health — including oversight of financial planning, reporting and risk management. In larger nonprofits, board members who have particular financial expertise often form a finance committee to support this work.
What key financial functions should the board be aware of?
Financial functions of particular interest to the board include:
Financial planning drives virtually every aspect of an organization — including the ability to provide programs and services, raise funds, and pay for people, equipment and facilities. The board's role in financial planning centers on evaluation of the issues most critical to your nonprofit's financial well-being. This may include:
- Your current business model
- Your organization's financial history and trends
- Organizational goals (including ways to meet them and corresponding costs)
- Organizational capacity to deliver on goals
- Financial risks and specific management strategies
- Benchmarks to monitor progress
- Your vision for financial sustainability
Financial reports and controls
The board's financial responsibility includes oversight of all financial statements and internal financial controls. This includes regular internal audits and all documents that make up the annual report, such as:
- Current and projected budgets
- Sources of revenue
- Audit results
- Internal financial controls
- Tax filings or returns
Board members should ask:
- Do our financial statements accurately reflect the organization's financial health? If not, how can we make the statements more useful?
- Do our audit results raise any red flags? If so, what can we do to address the issues?
- Do our tax filings represent our organization accurately? If not, what corrective steps should we take?
Should a budget deficit arise, the board must:
- Draft a plan to address the deficit
- Investigate the deficit's underlying causes
- Implement cost-control measures
Creating and maintaining an operating reserve is ultimately the responsibility of the board. The board must work with executive leaders to establish a financial goal for the reserve fund (such as three to six months' worth of expenses) as well as develop a policy to specify when operating reserves can be used and who's authorized to spend the funds.
What's the overlap between a board's legal and financial responsibilities?
The legal and financial duties of the board are closely aligned. For example:
- Duty of care: ensuring accountability. The legal duty of care relates to daily operations and essentially means the board is responsible for everything required to keep the organization in business and out of legal trouble. Board members are responsible for educating themselves about the nonprofit's work and the field in which the organization operates. In addition, the duty of care includes financial responsibilities such as ensuring accurate record keeping and monitoring financial transactions.
- Duty of loyalty: acting in the organization's best interests. The legal duty of loyalty describes the board's obligation to operate in the best interest of the organization, free of conflict. When representing the nonprofit, board members can't put their own personal or professional interests ahead of those of the organization. Similarly, board members can't use their position for personal or financial benefit.
- Duty of obedience: compliance with governing documents and the law. The legal duty of obedience refers to knowledge of and obedience to all applicable laws and regulations. For example, it's the board's final responsibility to comply with IRS requirements (in the U.S.) and Charity Commission guidelines (in the U.K.).
Above all, the board must strike a careful balance — maintaining strong financial oversight without getting bogged down in the day-to-day details. In this sense, leadership is key. The board offers expertise and insight, and, most importantly, acts as your organization's ethical compass in all financial transactions.
This article draws on the expertise of Grace Davies, a Minneapolis-based attorney with special interest in product liability, medical malpractice and employment discrimination, and Andy Nash, founder of Andy Nash Accounting & Consultancy in Hertfordshire, England.