An Executive Director’s Primer on Financial Management

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Not every executive director will come to the job well equipped to manage finances. If you happen to fall into the financially challenged category, don’t despair. Help is available from peers, board members, service providers, and consultants. As executive director, however, you must have a sufficient knowledge base in financial management to enable you to make the best use of this outside help.
Financial management is the foundation of planning and managing every other aspect of the organization, including buildings, equipment, people, programs, fundraising, technology, printing, and insurance. Thinking strategically when managing money is essential because it is so interlinked with every other function.

A thorough understanding of your agency’s finances will allow you to know if programs are cost-effective, if staffing patterns make sense, if the organization has a balanced budget, and if fund development can keep pace with the growth of the agency. Common questions that require a full understanding of agency finances include:

  • Do our financial decisions reflect our organization’s core values?
  • How much will it cost us to raise money this year? Over the next three years?
  • What are our staffing constraints, given our current and projected revenues?
  • What are the costs associated with operating core programs?
  • What are the costs associated with developing a new initiative?
  • How much will employee benefits cost? Do we need to change our benefit mix to adjust for anticipated rate increases?

Money isn’t just money. It is another lens through which we can view our organization’s current reality and future potential. Money, along with mission and values, should be one of the primary screens for all organizational decisions. Executive directors and boards of directors who do not understand this—who see financial management as a necessary evil or enemy of mission and program—run the risk of jeopardizing the organization’s future. Mission, money, and values are integrally connected as the core indicators for how, and at what level, programmatic actions can be taken.

Upholding fiduciary responsibility does not mean that an agency will remain forever solvent. Too many factors influence the financial health of a nonprofit organization for any guarantees. Careful financial stewardship, however, will increase the likelihood of stability and will enhance your organization’s credibility with all its constituents, both internal (board, staff, volunteers, members, and clients) and external (funders, vendors, colleagues, regulatory agencies). Confidence in the financial stability of an organization will increase the confidence of the staff to take on new challenges and make the organization a more valuable asset to the community.

Financial accountability is a shared responsibility of the board of directors and the executive director. In small organizations, the board or the board and executive director may do all of the financial management. As organizations grow, their roles and responsibilities become more defined, as outlined below.

Board of Directors: The primary role of the board is oversight. As the legally accountable entity for the entire organization, the board has overall responsibility for its financial health. (Also see Financial Responsibility of Boards article on page 48. )

The treasurer’s job is to review the organization’s finances at least monthly. Some treasurers rely on monthly statements and analysis provided by the executive director, bookkeeper, or controller. Others will “open the books” once a month and do their own analysis.
Other key financial responsibilities of the board (which each individual director takes on when he or she agrees to be a member of the board) include:

Approving the annual budget (and helping to design it in small organizations). The annual budget should use realistic (conservative) projections for revenue to help ensure that the organization does not end up with an unexpected deficit.

The budget should include expense line items that set the parameters within which the executive director can operate. We recommend a board-established policy that allows for a modest variance (generally five to 10 percent) for each line item, so that the executive director does not have to alert the board to minor variances—as long as the bottom line does not change. If the organization is being managed within these parameters, the board’s financial oversight responsibility should be limited to monitoring. Unless there are serious problems or the executive director or treasurer requests help, board micro-management of finances is usually counterproductive and not in the best interests of the organization.

Ensuring that the agency has adequate funds to operate on an annual basis.

Ensuring that all financial reports, taxes, and other government requirements are met by the agency.
Establishing policies and procedures to ensure overall accountability for programs and finances and to ensure that adequate systems are in place to implement them.

Choosing and contracting with a CPA to conduct an audit on an annual basis.
Ensuring ongoing fiscal monitoring. This role is extremely important because of the liability associated with a failure to exercise appropriate financial oversight. As stated above, the treasurer should carefully review the books monthly and report to the board at its regular meetings. A regular treasurer’s report to the board of directors is the foundation of the checks and balances system that ensures full disclosure and accountability within the financial function of the nonprofit organization. In the event of a financial crisis or serious irregularity, the treasurer should inform the president and, if necessary, request a special board meeting.

Executive Director: The primary responsibilities of the executive director are to understand the organization’s finances, interpret them for other stakeholders, and, together with the board, ensure the agency’s financial accountability to its community.

Typically, the board delegates responsibility for managing the functions that fulfill its role in meeting legal requirements to the executive director, who handles the actual contracting with auditors and filing of legal forms, such as annual reports and tax returns. The executive director, in turn, often delegates these functions to staff and consultants, depending on the size of the organization. The executive director must have a basic understanding of bookkeeping and nonprofit financial management. She or he should be able to read a budget, monthly financial statements, and audit reports and be able to understand, and sometimes develop, internal financial management systems and controls. In addition, the executive director should know how to project the agency’s financial needs against its fundraising capacity.

In smaller organizations where the budget does not support a separate financial management staff, the executive director typically takes on all the work of the financial manager as well.

Be honest with yourself. If you are not skilled at financial projections, monitoring, building meaningful budgets (operating, capital, and fundraising), and creating sound financial management systems, and you don’t have other staff who can do these things, get support from the board or community and meet monthly with people who can help you with your overall financial management responsibilities. No executive director will have every skill required for the range of nonprofit management functions. If your strengths lie elsewhere, find partners to help with financial management. Take a course from a nonprofit training center or local college.

In very small nonprofits the executive director or a board member is often also the bookkeeper. Note, however, that this is not a good situation—primarily for ethical reasons. If you find yourself in this situation, ask a local auditor (even if your organization is too small to require an audit) to give some pro bono time to analyze your financial management system and recommend appropriate checks and balances. (See Establishing Effective Controls Box on page 25.)

Financial Manager: Some organizations have a large enough or flexible enough budget to employ a financial manager or controller. A financial manager can take care of many tasks that would otherwise fall to the executive director, treasurer, and finance committee. A financial manager maintains the general ledger and can prepare budget drafts, develop financial management and monitoring systems, and assist with the financial details of human resource issues, such as retirement funds, health benefits, IRS Section 125 plans, and projecting cost of living and other salary increases. The financial manager can shop for better buys, research accounting software, monitor monthly expenses by line item, generate financial reports at the level required by the board of directors, monitor cash flow, assist with the budgets of funding contracts, and prepare reports to funders as required. In some cases, the financial manager will also do all the basic bookkeeping.

Bookkeeper: Many organizations have dedicated and highly skilled bookkeepers who do many of the tasks described above for the financial manager. The basic responsibilities of the bookkeeper, however, are to record income and expenses according to generally accepted accounting methods, create and maintain simple financial systems that enable the accurate recording of income and expenses on a monthly basis, prepare billings to funders and other customers, produce clear reports to the executive director and board of directors—typically on a monthly basis—and produce needed documents for the auditor on an annual basis.

Staffing Considerations: The way financial management tasks are handled within an organization often depends on the size of the budget and, especially in smaller organizations, on the competencies of the staff. An executive director who is a generalist and doing many other things should dedicate on average one to one-and-a-half days every two weeks to all the tasks related to financial management. Keep in mind, however, that this will only cover the basics.

With the widespread use of computers, the time needed for bookkeeping for nonprofits has been slashed dramatically. An experienced bookkeeper working with an organization that has sound financial systems, a modest number of government contracts, and a budget under $1 million should be able to fulfill basic bookkeeping responsibilities in eight to 10 hours per week. However, even a $1 million organization might need considerably more bookkeeping time, up to a full-time position, if it has multiple funding streams or government contracts that include strict budget and reporting requirements.

A growing, mid-sized nonprofit should consider hiring a full-time financial manager or experienced bookkeeper who can handle all the details. Such an action can free the executive director’s time to provide general management of this function and to position the organization for a more mature pattern of growth through sound financial practice. By the time an organization has reached the $2 million-plus level, a full-time accounting position is usually justified, especially if the organization’s finances are fairly complex (multiple state and federal contracts, ongoing fundraising campaigns that entail pledging, multiple sites or management of multiple facilities). Organizations of this size often need a half-time bookkeeping position as well. Larger nonprofits (over $5 million) will typically require a finance department that will include a controller, staff accountant, and bookkeeper. (See the article on external financial services on page 28 for a guide to outsourcing some of these functions.)

This article is excerpted from The Executive Director’s Guide, to be published in May 2001 by United Way of Massachusetts Bay. Copyright 2001, United Way of Massachusetts Bay. Reprinted with permission.

Deborah Linnell is a consultant and executive director of the Women’s Resource Center of the South County, Inc. in Rhode Island. Zora Radosevich is a staff consultant at Third Sector New England. Jonathan Spack is the executive director of Third Sector New England.

An internal accounting control system is a set of policies and practices designed to promote sound management and protect the organization’s assets, both general and financial. Effective internal accounting control procedures will increase the likelihood that:

  • financial information is reliable and accurate, dependably informing managers and the board as they make programmatic and resource decisions;
  • assets and records of the organization are secure and not stolen, misused, or accidentally destroyed;
  • programs are effective in acquiring and using the resources they need; and
  • the organization is accountable for the resources entrusted to its care, in that it follows organizational policies and procedures and meets funder and government requirements.

How to:

Identify Potential Abuses and Errors

The first step in setting up an effective internal accounting control system is to identify those areas where abuses or errors are likely to occur. Most accountants can provide checklists of questions to consider when developing such a system. For example, Price Waterhouse’s booklet, “Effective Internal Accounting Control for Nonprofit Organizations: A Guide for Directors and Management” suggests the following areas in which transactions should be properly recorded and approved:

  • Cash receipts
  • Cash disbursements
  • Petty cash
  • Payroll
  • Grants, gifts and bequests
  • Fixed assets

Divide up the Duties

The key to an effective system of internal controls is the segregation of duties principle: no financial transaction should be handled by only one person from beginning to end. This system of checks and balances reduces the opportunity for error and wrongdoing. This may be a challenge for small nonprofits, but responsibilities can be divided among staff and volunteers to reduce the opportunity for error and wrongdoing. For example, the executive director might sign checks prepared by the clerk, while the board treasurer would review disbursements and cancelled checks and prepare the bank reconciliation.

Ultimately, it is the board that is accountable for the protection and appropriate use of the organization’s assets, including establishing and monitoring the organization’s financial safeguards and compliance with financial policies. (See the department piece on page 48 for an overview of the board of director’s fiduciary responsibilities.) It is important for the board to contract for an annual independent audit, and to review the auditor’s management letter. This letter is an important indicator of the adequacy of the organization’s internal accounting control structure and the degree to which it is maintained. If applicable, the letter will cite significant weaknesses in the system or its execution. Therefore, to maintain effective controls, the board should review the management letter with the executive director, ask for responses to address each internal control lapse or recommendation, and compare management letters from year to year.

In general, the board sets the stage for accountability and is responsible for establishing policies and procedures for internal accounting controls. For instance, the board should consider policies and procedures for at least the following key areas:

  • Check issuance—whose signatures are required, what dollar amounts require board approval or board signature, and who authorizes payments.
  • Debt—whether debt and other financial commitments may be incurred and, if so, how these are approved, monitored, and reported.
  • Deposits—how payments made in cash (for example, admissions, raffles, or a weekly collection plate) will be handled, deposited, and reported and monitored.
  • Transfers—if and when the general fund can borrow from restricted funds.
  • Budgets, Plans and Commitments—what is the schedule for prior approval of the annual budget and plans, and periodic comparisons of financial statements with plans, budgets, leases, loan agreements, and other major commitments.
  • Personnel and Payroll Policies—what are the compensation levels, vacation, overtime, compensatory time, benefits, severance pay, and other personnel policies.

Refining and Revising Internal Controls as Necessary

As a nonprofit organization changes and matures, modifications usually need to be made to the internal accounting controls system. For example, changes in funding, staff, or programs, as well as regulatory adjustments, are reasons for a board to periodically review and revise the internal accounting control system.

David Renz and Rhonda Gerke of the Midwest Center for Nonprofit Leadership, Kansas City, Missouri, contributed this box. Substantial portions of the box originate from: “Financial Management/Frequently Asked Question #24.” Nonprofit Genie. San Francisco, CA: CompassPoint Nonprofit Services 2001. (