An Engaged and Empowered Board
A charitable organization’s well-being can be measured in many ways. The effectiveness of its board of directors is one. Steady guidance by a functional, engaged board can be the difference between a successful nonprofit and one that is struggling.
A nonprofit board’s responsibilities fall into four broad categories:
- Providing oversight to ensure the organization’s mission is fulfilled
- Developing policy
- Keeping the organization financially healthy
- Meeting legal requirements
It’s highly unlikely that all board members will be well versed in every category. Therefore, each member will need the necessary information and resources to be effective in all four categories.
Understanding the organization’s finances can present challenges for those without a background in business, accounting, or finance. But it doesn’t have to be a problem. A basic understanding of nonprofit accounting and the ability to read and understand basic financial reports will allow board members to participate in discussions and make informed financial decisions.
The best way to engage board members who may feel unempowered is to present the information in such a way that they can understand it. Rule number one: What’s important is not the amount of information, but the quality. Board members need timely reports that present a clear picture of the organization’s current financial status to guide their decisions. Avoid accounting terms and jargon, which might alienate some directors, and focus instead on how well you are getting to where you need to be. So instead of presenting the familiar year-to-date report at each meeting, it may be more valuable to prepare reports that reforecast the organization’s year-end results instead.
From a financial standpoint, the most important issues for your board to ponder are whether your organization is “living within its means” and whether it is sustainable over the long term. Here are some plain language questions to guide the discussion:
- Are the organization’s reserves being used for operating expenses?
- Do you have reliable, recurring revenue? If so, what costs does it cover?
- If you receive grants, are they able to cover the costs of the relevant programs/services?
- On what evidence/support are you basing your projections of future contributions?
- Do you have revenue and expense data for individual programs so you can project the impact of expanding, downsizing, or eliminating one or more of them?
- Are you expecting any exceptional gifts that would substantially change your financial position?
Understanding Funding Restrictions
Nonprofit accounting can be a little complicated for the uninitiated. Basically, organizations must keep track of where their money comes from (e.g., foundation grants, government funding, gifts from individuals, etc.). Some funds are donated without “strings.” These are unrestricted funds and can be used as your organization sees fit (often for general operating expenses). Restricted funds, on the other hand, come with strings attached that specify how and/or when the funds can be used. Board members and executives need to understand the difference for planning and budgeting purposes.