If you’re on the board of a nonprofit, or hold an executive position at one, it is your duty to understand the organization’s finances.
And if you fail to do so, you could be liable for financial mismanagement, says Marie Brilmyer, CPA, M.Acc, an associate director in assurance at SS&G.
“You have a fiduciary obligation to keep an eye on the organization’s finances by ensuring its resources are being spent in accordance with donor restrictions (if any) and are properly accounted for,” says Brilmyer. “You have the responsibility to make sure assets aren’t being misappropriated, because if they are, you could be held liable.”
Smart Business spoke with Brilmyer about why, if you serve at a nonprofit, you need to understand its financial statements and set a budget to increase employee accountability.
Why is it important to understand the financial statements of your nonprofit?
At nonprofits, there are a variety of individuals involved, such as members of the board, members of the advisory board or even the executive director, whose first priority may not be to understand the financial statements. However, that is their responsibility because they are charged with ensuring that the organization has adequate resources and protecting its assets. To do that, they need some financial know-how.
If you don’t have even a basic understanding of the financial statements and fraud is occurring, you’ll just be taking everything at face value. However, if you have that knowledge, you could dig a little deeper and know what questions you should be asking.
How can you get started?
To begin to understand your organization’s financial statements, sit down with your internal accountant, external auditors or the treasurer of the board, and have that person review the most recent financial statements in detail. You can also take a class or attend a webinar on the subject.
Look at the organization’s statement of financial position or balance sheet, which is a snapshot on a certain day at a certain point in time, typically the last day of the organization’s fiscal year. You need to understand what the assets are (what the organizations owns), how liquid the company is; what the liabilities are (what the company owes and when) and the organization’s net assets. It is also important to understand if there are any temporary or permanent restrictions on those net assets that can significantly limit their use.
Next, gain an understanding of the statement of changes or the income statement, which measures activities over time. What are the revenue and the expenses? What are you spending your resources on? Also take a look at the footnotes, which detail accounting policies, significant transactions and other items that are essential to gaining a complete picture of the organization’s finances. Keep in mind that this information will be tailored specifically year by year, and that what you see this year might change next year, particularly if there are new accounting standards.
Who should review the financial statements beyond the executive director and the board?
Everyone in the organization should be familiar with the financial statements on some level. It comes back to being accountable to the expenses that they are in charge of. If someone doesn’t understand the financial statements, it’s difficult to hold that person accountable.
How can creating a budget help an organization be better managed?
Not every organization has one, but even the smallest organization can benefit by having a budget as an internal guide to help maximize the use of their resources. For instance, an organization may be debating if it should buy a particular piece of equipment versus leasing it, or if it should move into a new building, and having a budget can really help management and the board make those sound decisions.
Besides being a great overall management tool, the budget can also help hold people accountable by giving them guidelines as far as what an individual or a department can spend on a particular activity. Keep in mind that this only works if the budget is communicated to that individual or department prior to any expenditures. This review can also give them a chance to speak their minds if they feel it is unreasonable.
Where can an organization start if it hasn’t previously done a budget?
Start by looking at the organization’s financial history. What do you anticipate the activities to be moving forward? For next year, what’s going change? Are you giving everyone raises? Are you hiring new staff, or letting people go? Are you holding new events? Look at everything that happened last year and build in provisions for your expectations for the next year.
Often, it’s a guessing game, in which you hope for the best, but you don’t know for sure. Some expenses are easy to anticipate. You know what the rent is going to be and you know what the salaries are, but it’s the revenue that causes the most grief. For example, you may have received a $5,000 donation from a certain donor each of the last five years, but you can’t say for sure whether you are going to get it next year.
As a result, you need to continually revisit that budget. It’s a good idea to take a look at it every month and do a budget-to-actual analysis. See where you’re at, where the money is coming in and what money is going out. If you thought you were getting $5,000 and have been notified that you are not, you have to change the budget accordingly. Your budget can help you make sure your cash flow is in place so that you can adjust for any shortfalls.
Marie Brilmyer, CPA, M.Acc, is an associate director in assurance at SS&G. Reach her at (330) 668-9696 or [email protected].
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