THE BOARD OF Directors of a nonprofit association is the last line of defense when it comes to reviewing and monitoring the finances of the organization. If an error or issue is not caught or questioned by the Board, there is little chance the issue will be identified. Management of a nonprofit association should be providing the Board or Finance Committee with certain key financial reports in order for the Board to exercise its oversight of the organization’s finances. These are the key financial reports that an Association’s Board or Finance Committee should reviewing on a monthly, or at a minimum, a quarterly basis, to ensure effective oversight of the organization’s finances:
1. Budget vs. actual. Board members should receive a budget vs. actual (B v A) analysis report from management. The B vs. A report should at a minimum contain a year-to-date comparison of the organization’s budgeted vs. actual revenues and expenses, but ideally would also have a monthly or quarterly B v A comparison. If your organization has multiple programs, management should be preparing the B v A analysis by each major program in order for the Board to understand if there are any specific programs that need more focused attention.
As part of the B v A analysis, management of your organization should be providing explanations for significant variances between the budgeted and actual amounts. The Board should be asking additional questions as needed to be comfortable with their understanding of these variances and any impact on the future activities of the organization.
2. Actual current year vs. actual prior year results. Management should provide the Board with a comparative income statement of the current year revenues and expenses compared to the prior year. Similar to the B v A reports, management should be providing a month-to-date comparison in addition to the year-to-date comparison, as well as a current year vs. prior year analysis for each major program of the organization.
As part of this report, management of your organization should be providing explanations for significant variances between the current and prior year amounts. The Board should be asking additional questions as needed to be comfortable with their understanding of these variances and any impact on the future activities of the organization.
3. Balance sheet changes. Management of the organization should be providing the Board with a comparative balance sheet of the organization’s key assets, liabilities and net position. Management should provide the Board with a comparison of the current month or quarter end balance sheet, compared to the prior fiscal year end, and the prior month or quarter end. Management should provide the Board with explanations for significant changes in key balance sheet line items.
As part of the Board’s review, the Board members should look for and ask questions about:
- Changes in cash balances
- Changes in restricted cash or other restricted assets
- Review the accounts receivable aging and ask about possible collection issues
- Review of changes in restricted net assets
4. Review of compliance with key finance policies. Does the organization have any key internal financial policies or ratios? Management should be providing the Board with a report of the organization’s compliance with any internal financial policies, requirements or ratios.
5. Review of monthly bank reconciliations. If your organization is small, a member of the Board should be reviewing the monthly bank account reconciliations and asking management about any long outstanding items or unusual reconciling items.
6. Review of liquidity needs. Many associations, especially smaller ones, are operating on very narrow budgets. Management should be providing the Board with an analysis of cash flow and liquidity needs of the organization. Does the organization have enough projected cash inflows to cover operations for the next three months? Next twelve months? Does the organization have alternative sources of funding if needed? (Credit cards? Lines of credit?)
7. Grant compliance financial covenants review. Is the organization dependent on a few large key grants to fund operations? Do the grants contain financial covenants in order to maintain funding from the grantor organization? In this situation, management should be providing the Board with an analysis of the organization’s compliance with the grant financial covenants. Any out-of-compliance issues should be addressed by management with a proposed corrective action plan.
8. Debt compliance financial covenants review. Similar to grant financial covenants, if the organization has outstanding loans or other debt with contain financial covenants, management should be providing the Board with an analysis of the organization’s compliance with the debt financial covenants. Any out-of-compliance issues should be addressed by management with a proposed corrective action plan.
9. Review of the Executive Director’s credit card use. A recent trend of frauds at nonprofit organizations by Executive Directors highlights the importance of the Board’s oversight and review of the Executive Director’s expenses.
These issues highlight the importance of a nonprofit Board to closely review and approve the monthly expenses of the Executive Director and other key members of the management team.
10. Key ratio analysis. The following ratios may or may not be applicable to your association, depending on your association’s activities and programs. However, there are a few key nonprofit financial ratios that a Board should consider reviewing each month or quarter. These ratios may be important to other foundations or organizations who rely on a nonprofit organization’s financial results when determining grant awards or other contributions:
- Program Expense Ratio – Percentage of expenses a nonprofit is spending on its core mission. Charity Navigator (www.charitynavigator.org) indicates a ratio of 85% or higher is considered favorable.
- Administrative Expense Ratio – Percentage of expenses that are being allocated to administrative costs. This nonprofit ratio is often misunderstood. There is an “overhead myth” that organizations shouldn’t spend money on administrative expenses. This is not true and would be a detriment to the organization. In order to stay competitive and to keep up with technology and infrastructure, organizations need to spend money on overhead. Charity Navigator generally gives its highest rankings to organizations that spend less than 15% of expenses on overhead.
- Government Reliance Ratio – An organization’s reliance on government funding. This nonprofit ratio is important, particularly when overall levels of government funding are declining. The higher this ratio is, the less likely a nonprofit organization will be able to continue to support its programs in the event that funding goes away. Organizations with high ratios in this category should consider how they can diversify their revenue sources.
- Personnel Expense Ratio – Personnel costs of producing revenue. The benchmark for this nonprofit ratio may look different for each organization, depending on how service-based the organization is. For example, an organization that provides counseling services may have a higher ratio than an organization that provides information and advocacy. Organizations should look for trends in this ratio. If it’s costing more to generate the same level of revenue, it could be a sign that there are inefficiencies in operations.
- Fundraising Efficiency Ratio – How much revenue is being generated for every dollar spent on fundraising. A lower ratio is considered better, and Charity Navigator gives its highest ratings to those organizations that spend less than $.10 for every dollar raised.
The above reports are not all-encompassing. Each Association Board should determine, based on the organization’s activities and size, what are the key financial reports the Board needs to review.
This article originally appeared in the Summer 2023 issue of The Executive, a publication of the California Society of Association Executives.