Your Questions Answered: Financial Best Practices For Your Board

After last week’s webinar, Ellie Hume of Your Part-Time Controller is back to answer the burning questions she didn’t have time to address during the presentation. Want to learn more? Watch the webinar on-demand here.

You mentioned a few policy musts, including setting proper levels of approvals for cash disbursements. Why do you recommend avoiding company credit cards?

Company credit cards, without the proper internal controls, approvals, and review, can open an organization up to fraud. We understand it is hard to operate without a credit card in today’s digital world, but too often we see this mode of payment being abused and often no one is checking to make sure the payments being made are appropriate for business purposes. There have been so many stories in the news talking about fraud at nonprofits where staff members, executives and even Board members were misusing the company credit card for personal expenses. If you do decide you need them, limit it to a few key card holders who must sign a policy document acknowledging the appropriate use, as well as the consequences for misuse. Additionally, require that all purchases have appropriate approvals and are accompanied by receipts.  Then hold EVERYONE accountable to follow the policy, with no exceptions – that’s setting the tone at the top!

How much of a reserve is acceptable for a nonprofit? What is a good balance between too little and too much reserves? How do you determine the appropriate level of operating reserve for your organization?

As we noted in the presentation, there’s no one size fits all, but I like to equate it to personal finances and there’s a general recommendation that people should strive to have 3 to 6 months of cash on hand to cover normal expenses at all times. For an organization with an annual budget of $1.2M, the average monthly operating expenses would be $100k ($1.2M divided by 12 months). So $300k – $600k is a good reserve to work towards. Some organizations may decide that a smaller or larger reserve is appropriate, but be mindful that when you have too much reserve, it raises the question, why isn’t the organization investing that money back into the mission? Be strategic with reserves and don’t just hoard them for the sake of hoarding. Keep a cushion, but make plans to invest in infrastructure and people, new programs, or enhancing the programs you already have. A nonprofit’s main goal is to keep investing in the mission of the organization, not to save up large sums of money with no plans on how to use it. When determining the appropriate level of reserve for your organization, consider the seasonality of expenses, as well as cash flow by looking at historical trends. Think about the times when expenses were the highest and cash was at its lowest, then set yourself up to build a reserve that will help the organization weather those stressful times more easily.

Will granting agencies be willing to give if they see the organization has surpluses each year?

YES!! Grantors like to give funds to healthy, well-run organizations because they feel these organizations will be the best stewards of their funds. Having deficits year-after-year and dwindling reserves is a red flag to funders, unfortunately. We know the struggling organizations need the grants the most, but the funders want to know their funds will be used wisely and they see surpluses and reserves as a good measure of financial health and ability to run the organization effectively.

What are the financial statements you recommend that nonprofits should be providing to management and the board on a monthly basis?

One of our top 5 financial management best practices is ensuring the organization has an efficiently functioning Finance Department, including timely and complete financial reporting. A complete set of financial reports, at a minimum should include 3 statements – a Statement of Financial Position (Balance Sheet), a Statement of Activities (Income Statement or P&L), and a Statement of Cash Flows. When read together, these 3 documents tell the whole story about an organization’s financial health. Pushing beyond these basics, you should strive to have comparative financial statements to show how the organization is doing compared to the same period in the prior year and/or to the budget. We realize not everyone is skilled in reading financial statements, so we recommend the reporting package include a memo that will highlight the most important information for the month, as well as explain significant variances from year-to-year or from budget.

What resources are available to nonprofits to help understand best practices and provide an orientation to new members?

We highly recommend BoardSource as one of the “go to” resources for nonprofit boards and good governance practices. There are free materials as well as a rich library of content for paid subscriptions. Specific topics covered include: orienting new board members, assessing board performance, the board/staff partnership, evaluating executive compensation, and other important aspects of board responsibilities. The board of directors is a critical component of a successful nonprofit organization providing oversight, support, and expertise. To achieve this desired state requires genuine collaboration between the board and the CEO/Executive Director to understand the boundaries between governance and management. The board hires the CEO/Executive Director [ED] to provide vision, strategy, and manage the organization. The CEO/ED needs the board to be informed advocates and ensure that the organization is meeting its mission by holding the CEO/ED accountable plus help with building the resources necessary.