Chances are if you serve on a nonprofit board and don’t understand something related to the financials, you’re likely not alone. Even if your background includes finance, nonprofit accounting is different. These differences might be major or subtle nuances. If you see something, say something. Don’t be afraid to ask questions. Others on the board are likely wondering the same thing. Here are five red flags to watch out for:
This article originally appeared in Phoenix Business Journal.
Chances are if you serve on a nonprofit board and don’t understand something related to the financials, you’re likely not alone.
Even if your background includes finance, nonprofit accounting is different. These differences might be major or subtle nuances. As someone with more than 25 years of nonprofit accounting experience, here's some advice: If you see something, say something. Don’t be afraid to ask questions. Others on the board are likely wondering the same thing. Here are five red flags to watch out for:
Too often, I’ve heard board members remark they don’t receive monthly financial statements. Even if your board doesn't meet monthly, you should still receive financial reports each month. The board might need to address serious issues, but without timely financial reports, you might not know it until it’s too late.
Financial reports should contain at minimum the four standard nonprofit reports: The statement of financial position; the statement of activities; the statement of functional expenses; the statement of cash flows. One report won’t tell the whole story. The four core financial reports each provide different, complementary insight like pieces of a puzzle. If you aren’t receiving all four monthly, you don’t have what you need to make informed decisions. Require these reports every month.
One of the most obvious errors I see in financial reports are negative amounts. With very few exceptions, the amounts showing in the financial reports should be positive numbers, not negative. A negative number is almost certainly an error. If you see negative accounts in the reports, bring it to the attention of others.
Even without a complete understanding of accounting principles, you should still ask questions when seeing potential issues, such as revenue not meeting projections or expenses exceeding revenue. In either case, regardless of budgeted expenses, if the revenue is not there, you should consider cost-cutting measures. Don’t wait until the end of the year to speak up. If you notice a downward trend over even a couple of months, ask if this is a timing issue or if expense-cutting needs to be considered.
Cash balances may be declining because expenses exceed revenue. However, If you notice revenue is exceeding expenses, don’t be lulled into a false sense of security. Revenue can meet projections and exceed expenses, but cash might be going down. How can this happen? If the organization has receivables, revenue has been recognized. If you notice revenue is going up but cash is going down, this might indicate the nonprofit is not collecting receivables in a timely manner. Don’t let cash balances continue to decline without taking action.
As a board member, you are entrusted to govern the organization. You are one of the leaders of the organization, and it is prudent to set the “tone at the top” by communicating the importance of financials and being an active participant in your fiscal duty. Don’t be caught off guard by financial issues that you would have seen coming if you were only looking and spoke up when you saw something.
