Top 5 Financial Management Best Practices for Nonprofit Boards
By Gregg Indictor, Manager and Eleanor (Ellie) Hume, Director, Your Part-Time Controller, LLC
While nonprofit board members are not usually involved in the day-to-day activities, they are ultimately responsible for managing the organization and making important decisions that fulfill fiduciary duties to both the organization and public that it serves. In this article, we’ve compiled five of our top financial management best practices for nonprofit board members.
- Tone at the Top: Management and staff will often mirror the actions of the board. Therefore, it is vital for a board to exemplify ethical behavior. It seems obvious—but it must be said—board members need to be beyond reproach in their words and actions as they relate to governance and financial management. Actions should include having a risk management mindset for safeguarding the organization’s assets (and its reputation), implementing and enforcing financial policies and procedures, and ensuring the right people are in place on board committees, management positions, and finance. Best practice tip! Exemplify the proper ‘Tone at the Top’ by simply encouraging board members to ASK QUESTIONS—board members should not be afraid to question nonprofit management or staff.
- Governance: To best govern nonprofits, boards will need to maintain committees for finance, audit, and investments. There should be regularly scheduled board and committee meetings with attendance requirements (!) and appropriately experienced members for each committee. Best practice tip! A thorough board or committee member orientation is a must. During orientation, board members should receive and review the bylaws, financial policies, the last financial statement audit, and the Form 990. Throughout, members should be provided the opportunity to talk with management and staff.
- Strategy and Sustainability: Although management is typically responsible for annual operating budgets, the board should set the vision—and an overall direction—by creating 3-5 year strategic and financial plans. Sustainability can be monitored through short-, mid-, and long-term cash forecasting. To help guide these forecasts, the board should establish a liquidity policy and an operating reserve policy (aka rainy day fund). Best practice tip! Monitoring performance is vital; financial activity should be compared to the annual operating budget and results from prior periods and from peer organizations. If something doesn’t seem right, board members should not be afraid to ASK WHY.
- Finance Department and Financial Reporting: A strong finance department starts with hiring; it is important to source individuals who can meet the board’s expectation of presenting timely and accurate financial information. It may be tempting to use volunteers, but nonprofit accounting requires several specialized skills, including the ability to interpret and record contributions (particularly those with donor-imposed restrictions or conditions). Consider seeking out professional consultants to ensure properly qualified employees are hired for the finance team—volunteers can always help advance an entity’s mission in other meaningful ways. Best practice tip! The easiest way to ensure financial reports are accurate is to insist that bank and other account reconciliations are performed monthly. This includes credit card accounts as well as investment accounts.
- Transparency and Accountability: Publishing the annual audit and Form 990 on the organization’s website is an easy way for a nonprofit to cultivate donor trust and share financial successes (and struggles). Other ways to cultivate trust include conducting compensation reviews for key management positions, inviting finance staff to board meetings, and scheduling an annual executive session with the auditor to discuss any issues or concerns identified during the audit. Best practice tip! Charitable organizations can easily showcase transparency and accountability by earning a GuideStar Seal of Transparency. This provides an opportunity for a nonprofit to highlight its mission and impact in the community.
While the above best practices lead to overall success, proper implementation relies on one common theme: effective communication. Nonprofit board members have the right—and the responsibility—to engage and demand accountability from one another and their finance departments.