Nonprofit board members: Watch for financial warning signs
In addition to widespread federal funding cuts, many not-for-profit leaders are concerned about a possible economic downturn. If you’re a on the board of directors for an organization whose finances aren’t in good shape, its ability to fund critical programs — or even remain operational — could be severely undermined. You and the rest of the board play a vital role in keeping your nonprofit in fighting shape. So keep your eyes open for such warning signs as:
No budget — or a poor one. Having no budget shows an undisciplined approach to fiscal matters. Your board should require a budget and ensure it’s in line with board-developed and approved strategies.
Unexplained variances. After the budget has been approved, the board needs to compare it to actual results to identify discrepancies. Some variances are bound to happen, but your nonprofit’s staff should have reasonable explanations for them.
Unusual spending. Board members must be wary of overspending in one program that’s funded by another. Dips into your nonprofit’s reserves, unplanned borrowing or raiding your endowment might mark the beginning of a financially unsustainable cycle.
Sloppy statements. Inconsistent financial statements — or statements that aren’t prepared using U.S. Generally Accepted Accounting Principles (GAAP) or another accounting basis — can lead to poor decision-making. They can also undermine your nonprofit’s reputation because they may be read as a sign of lax internal controls, mismanagement or fraud. Your board must make sure statements are prepared properly.
Late financials. Ideally, board members should receive financial statements within 30 days of the close of a period. Larger organizations should generally engage outside CPAs to perform annual audits, with the whole board or audit committee selecting the auditing firm.
Stakeholder misgivings. Not all red flags are found in a nonprofit’s numbers. For example, if long-standing, passionate supporters express doubts about your organization’s finances, board members need to take them seriously. Your board also should note if the development staff is reaching out to historically major donors outside of the usual fundraising cycle.
Executive director overreach. Sometimes, an executive might insist on choosing an auditor or might make strategic or spending decisions without board input and guidance. Such power grabs could signal dishonesty or financial instability.
If you’re a board member, keep in mind your fiduciary responsibilities, which require identifying and acting on financial warning signs. Contact us for assistance. We can review your budget and financial statements and suggest strategies for dealing with an unpredictable future.
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