On virtually every board of
every NonProfit throughout
the world, there are board members who do not understand how to read a
sheet, a profit & loss statement, or any of the other financial
typically review and vote on. On many boards, that may just
few individuals. On other boards, it may be a majority of board members
who do not understand the financial statements and reports
that are regularly
placed in front of them.
The consequences of this
situation are many, for example...
members who vote
to approve the budget, but don’t really understand the budget.
members who make
decisions on whether or not to hire a new staff person, but don’t
understand whether or not the organization can afford that new
members who vote
on which fundraising approach to pursue, but do not understand
analysis to determine if that really is the best choice.
Most people would agree that it
is bad policy to allow
individuals to make decisions about things they do not understand. Yet
day, board members make countless decisions without understanding the
ramifications of those decisions.
And so, herewith,
some basic first-step
information, to spark your board’s thinking about the financial reports
they discuss and vote on every month.
you think your board is
accountable for the money
more than anything else, read this
Overall Economics and
Basic NonProfit Information:
does it mean that
your organization is NonProfit? Is the organization allowed to show a
What happens if you do?
do most funds
come from in the NonProfit sector? Are they mostly from grants?
“Opportunity Cost” mean? How does that affect your board’s
At the end of their fiscal
year, a small nonprofit arts group had
funds left over in their account. The board voted to donate every penny
those funds to another charitable organization, because they thought a
NonProfit wasn’t allowed to have funds left over.
Some Economics /
An economy is a dynamic system
where forces play against
each other. Economics has more to do with understanding how the world
how decisions affect other decisions, than it has to do with numbers.
A basic knowledge of overall
economics will help you put
your organizational decisions into the bigger context of the economy of
community, your state, your world. It will also help you understand how
decision affects others your organization will have to make. How do
relate to other parts of the economy? What are NonProfits allowed to do
allowed to do? This basic information will help your board govern more
is the balance
sheet? What story does it tell?
liabilities good or bad?
is a debt/equity
ratio? What does it tell about the organization? Can you find the
ratio on your organization’s balance sheet?
An organization had gone
through financial difficulties,
but those troubles were now in the past. Even though their balance
a strong healthy organization, most of the board members didn’t
the balance sheet. They continued to make decisions as if the
in trouble, even though the board treasurer - a banker who certainly
the financials - repeatedly told them, “We are doing fine!”
Some Balance Sheet
balance sheet is a snapshot of your organization’s financial status
describing the relationship between what you own RIGHT NOW vs. what you
question answered by the balance sheet is simple: As of this very
stable is our organization? If we were to put all the facets of our
organization on one of those old-fashioned scales, would it tip over
the side with the debts on it, or would it tip to the side of what we
the balance sheet is like that balancing scale, one individual number
is of no
importance without knowing how that number relates to the numbers on
side of the scale. That relationship will show you how stable the
$50,000 in debt a lot or a little? If you understand the balance sheet,
will know that the answer depends on the rest of the story. With $20
the bank, $50,000 is probably not a lot of debt. With $27.32 in the
$50,000 is a lot of debt. On the balance sheet, no number stands alone
it’s all about the relationships that tip your organization’s scales
in one direction or another.
Profit and Loss / Income
/ Cash Flow Statement:
What story does the
Profit and Loss Statement tell?
you tell whether
your organization’s funding comes from many different sources, or just
few big contracts?
you tell what your
biggest expenses are? Is it ok that those are high? Why? Why not?
your board gets
most riled up about a particular expense item, what percentage of the
organization’s overall expenses does that item represent?
We witnessed a $1.7 million
organization spend 15
minutes of a board meeting discussing the fact that the staff had
$200 fax machine. Not only did they spend precious time talking about
that had already happened (without creating any policy to prevent the
they were concerned about from happening again), but they spent that
time on an
item that amounted to .01% of their annual expenditures.
Some Profit and Loss
Profit and Loss Statement is like a summary of your checkbook, broken
category. The P&L answers this question: What did we spend
money on, and
where did that money come from? One of the most
important things to
remember about this report is that it looks at the past.
There is nothing a
board can do about the past, but you wouldn’t know that from most
board discussions of the Profit and Loss Statement! Because this report
similar to their own finances, most board members feel comfortable
apart the organization’s expenditures, with no real end in mind. They
think that’s what they are supposed to do!
are, in fact, good reasons to examine the expense side of this report.
those is to examine areas where proactive policies could prevent future
problems. Even more important is that this is the board's opportunity
to examine how those expenses relate to the organization's strategic
objectives. "We said
that training for our 30 employees is a high priority, but we
only spent $200 on training last quarter. Are we actually
training people?" The P&L would tell you
The other area
of value for this report is one that many boards
ignore - the income side.
Boards tend to ignore this side of the equation because they don't
understand the complex nature of funding in the NonProfit world. Board
members who do not understand the income side of the P&L miss
the opportunity to examine, for example, whether the
organization is receiving
its funding from diverse sources, or whether all its eggs are coming
basket - perhaps government funding or grants.
understanding the real significance of this “look into the past”,
boards spend inordinate amounts of time reviewing insignificant line
expenditures. Once this report is seen in context, however, it is easy
understand what really is worth discussing, and why.
story does the
often should you
look at the budget throughout the year?
the budget is
approved, can it be changed throughout the year? Why? Why not?
Every year, the XYZ Group would
create a strategic plan.
And every year, the plan wouldn’t be implemented. When asked why
ever happened, the answer was, “There was no money in the budget to
implement the plan.”
The balance sheet describes
today. The Profit and Loss
statement describes the past. The budget, however, describes the
only thing the
board can control - the FUTURE. The budget is
nothing more than a
projected Profit and Loss Statement. It tells what you anticipate
money on, and where you anticipate funds will come from to pay for
budget is evidence of the board’s priorities. A budget that changes
from year to year is often proof of a board with few priorities for
organization will be accomplishing in the community. A budget that
marked change from year to year is often evidence of a board with
priorities for making a real difference in the community.
- Will we increase
programming in a
- Will we try to
instill more stability
into our income stream?
- How will we be
aiming for better
results for the community?
- Did we plan for
These are among the
questions you will want the budget to answer.
you including all your in-kind
support in your budget?
As you look at the things your
board members should know
about your organization’s finances, and you consider the things they
NOT know, you can see that board members who don’t understand the
organization’s financial matters make it difficult for the board to be
accountable - both for the money, and more importantly, for
accomplishing the mission.
There is one more important
fact when it comes to understanding your organization's financial
data: liability. Although most states in the U.S.
limit the liability of individual board
members, those waivers are based on the premise that board members have
everything they can to be prudent in their decision-making. And there
is nothing prudent about voting on a $2 million budget without
understanding what you're voting to approve.
Understanding the finances is
therefore imperative - not just for the good of the organization and
the community, but for each individual board member.
So train your board members.
Use cover sheets and dashboards that
help explain the data in ways that nonfinancial people can understand.
And make sure these caring individuals are prepared to help your
organization make significant improvement to the
quality of life in your community.