As a Nonprofit Board Director or Senior Leader, you’re there to drive positive change for the people and causes you care about. However nonprofit organizations and charities, as with other businesses (and yes, your nonprofit is a business), can easily end up in the news for the wrong reasons. Nonprofits and charities must always have the resources required to meet obligations and achieve the mandate. Solid, ethical financial oversight and decision-making by the board of directors is the foundation to avoiding unfortunate high risk, client/staff/agency-impacting damaging scenarios.
When in doubt, go back to your corporate legislation. There will be a section about the Standard of Care and Loyalty and/or Fiduciary duty… the duty of nonprofit directors to act in the best interests of the organization they serve, even at the expense of their own self-interest.
Here are a few important strategies and success approaches to consider (1).
1. COMPETENT, ETHICALLY-BASED, CLIENT-RESULTS-FOCUSED BOARD MEMBERS & MANAGERS
Every board member need not be from a finance background. However, having this expertise on the governance team is important. Those individuals need to be supported in speaking up and guiding the team towards risk-managed and legislation-compliant decision making. All board members need one or more orientation sessions re. your agency’s finances and systems, and there should be ample time for question and discussion. Your CEO or ED and all managers need nonprofit finance training if they do not have this as yet.
Are your agency’s financial targets directly related to mission results? What are the client or cause’s needs and donor or funder expectations? If finance planning is not focused on sustaining the agency’s efforts to meet those needs, you have an issue. Is your agency veering off from its intended Articles of Incorporation or purpose? If so… red flag.
All Board members should have current Governance Essentials Training, and the Board’s Performance should be evaluated annually.
It goes without saying that individuals with a criminal background of fraud need to seek elsewhere to gain employment or a volunteer board position with a nonprofit. We’re saying it regardless as yes, this does happen unfortunately, usually due to less-than-robust credentialling.
2. FINANCIAL CONTROLS
Policies and procedures which protect the nonprofit organization’s assets and effectively manage financial risk must be in place and complied-with. Otherwise, your agency may not be able to continue its service to clients or its cause, at some point. Effective risk management requires, for example, that at least two individuals’ signatures are required in binding the corporation through transactions. Ex.: cheques and funding agreements. Typically, the Board Chair and CEO would sign binding documents.
Do all staff involved in managing even the smallest budget understand the financial processes and controls? How do you know for sure? Who is overseeing their work?
A good practice is for the Board to manage and authorize the overall Finance Policy. This policy should include at a minimum, the following categories of direction:
3. MONITORING & AUDIT
Does the agency use a reliable set of performance indicators to track financial status monthly? All Board members should be aware of significant variations from the budget, understand the justification for these and ensure corrective action is taken when necessary. Ensure all questions are tabled and responses are complete – no stone unturned. Expecting that the Audit will reveal all problematic areas and that these can be solved or corrected at year end is bad practice. Not knowing the agency’s debt status and repayment plan if required is high-risk.
The annual financial audit must be completed by a reputable firm hired by the Board. What is the audit supposed to accomplish? Avoid the mistake of assuming the audit will “catch” all financial issues and report these to the Board. Also, is your Board using the same auditor year after year, without ever going to RFP, or exploring options? If so, why?
Very small nonprofit boards often function well as a committee of the whole. Larger agency boards usually have a Standing Committee for Finance, as per its By-law.
4. FUNDRAISING
Your country and/or sector’s charities and fundraising legislation must be complied-with, in detail. The CEO requires the training to safely manage all fundraising. All staff and volunteers involved in fundraising require comprehensive training, supervision and support.
(1) This article is for discussion only, and not intended as financial advice in any manner. Data included is only a small part of a nonprofit organization’s financial activities, controls and processes. Nonprofit organizations and charities should consult financial experts as required. Nonprofit board of director and leadership teams need financial training and expert financial manager(s), support and/or counsel.
The term board director here can be replaced with trustee, governor, etc.
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