Editors’ note: This article, first published in print during Jan/Feb 2011, has been republished for Nonprofit Quarterly with minor updates.
We’ve spent a collective fifty years working with a variety of organizations, especially community-based groups. After all these years, we still dream about the perfect trustee. When considering the board’s role in financial oversight, the dream goes something like this (cue dreamy music…)
I ran into a friend in the grocery store. We’re hanging out in the aisle, chatting about our neighbors and families, when the conversation turns to a local nonprofit.
“Aren’t you on the board of Neighbors Helping Neighbors?” I ask.
“Yeah, a little over a year.”
“Your first board?”
“Not if you count my kids’ preschool, which was a big mess. This board did a nice job orienting me, so I’ve got a pretty good idea of how things really run.”
“I’m familiar with the group, but I don’t know how big they are. What’s the annual budget?”
“About $300,000 last year. We’re hoping to get to $350,000 this year.”
Being a fundraiser, I ask, “How do you raise the money?”
“Well,” she says, “about half of our budget comes from state funding, a quarter from the city and county, and the balance comes from foundations and individual donors, including 5 percent that we raise at our annual dinner. Would you like to buy a ticket?” she asks, raising one eyebrow.
“Of course,” I say, laughing. “But first, tell me where the money goes.”
“We’re a social service agency, so the biggest line item is salaries: about 70 percent of the budget. That includes staff to coordinate almost 100 volunteers. The rest goes to rent, utilities, accounting, staff development, the usual stuff. We also pay mileage for volunteers, because they do a lot of driving. We like to say that 85 percent of the money we raise goes to program costs.”
Because she seems perfectly comfortable with the conversation, I press on. “Do you have a reserve fund?”
“Not a formal one,” she says, “but we try to have money on hand to manage our cash flow needs. Our goal is to have three or four months’ operating income in the bank, in case our state funding is reduced or delayed. We’re a little short of the goal, but if the benefit is a big success, we plan to rebuild our reserves. Now about that ticket….”
We wake up smiling. What a lovely dream!
One can debate what all the dimensions of board leadership entail, but one essential aspect is written into the law governing nonprofit organizations: fiduciary responsibility. These are big words, and they don’t mean simply approving a budget or signing off on an audit. In the deepest sense, accepting fiduciary responsibility means integrating financial thinking into every aspect of board governance. If you don’t know the basic financial information by heart—if you’re not steeped in the numbers and understand why they’re important—it’s very hard to exercise that responsibility.
So imagine we bump into each other and start asking about your organization. Could you answer the following questions—or would you turn and run?
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- What’s your annual budget?
- What is your current income mix—and what would be the best mix of income for your organization?
- What are your largest expenses? How much of the budget do they consume?
- Do you have a policy about building a cash reserve? How much money do you need in your reserve fund? How would you use it?
- What are your organization’s biggest financial risks?
- How do you use financial management tools to measure your impact? Does your organization compute the cost per unit of service: for example, for each client you serve, audience member you entertain, acre you protect?
These questions are captured in the online worksheet, which we encourage you to share with your board. If you can answer them with confidence and clarity—and you can answer most of them without shuffling through a pile of papers—please pass this article to a colleague and consider mentoring that person in the joys of financial management.
“There is no magic or secret to financial management. You know more about it than you think you do.”
—Terry Miller, Managing for Change
It won’t surprise you to learn that financial management is a weak link in many, many organizations. Planning and budgeting combine all the money taboos with that common disorder, math phobia. Put a spreadsheet in front of many nonprofit leaders and they’ll run screaming from the room, or try to escape without being noticed. Terry Miller’s book, Managing for Change, is aimed at staff, but his advisory holds true for boards: “If you try to avoid financial management, the ironic thing is that you may spend more of your time on it than you would otherwise—like any good discipline, good financial management makes life more systematic, easier to get the work done.”
As the Institute for Conservation Leadership (icl.org) says in its guidebook for executive directors, “The biggest barrier to good financial management isn’t mathematical ability or accounting know-how, it’s attitude. For many of us, accounting and financial management are downright intimidating. The language of professional accounting—accounts receivable, temporarily deferred income, and the like—tend to make it so.”
The language metaphor is instructive. Some of us have a natural gift for learning foreign languages, while others have to work a little harder. But for anyone who has struggled to master a second or third language—Spanish, Chinese, English, whatever—there comes a moment (or perhaps a series of moments) when things begin to click.
Instead of laboriously translating each word inside your head, the words just arrive. As you gain more practice, they arrive in phrases or complete sentences. Pretty soon you’re ordering off the menu, reading the weather forecast, asking for directions, and telling stories. When you nod off to sleep and start dreaming in your second or third language, your relation-ship with that language grows deeper and more familiar.
The ICL guidebook offers (and debunks) several myths, which are adapted below with permission. We have mixed in a few more for good measure.
Myth 1. Attention to finances detracts from the “real work.” So many nonprofit advocates and program managers, not to mention board members, have bifurcated brains: program work and advocacy on one side, fundraising and finance on the other. Our goal is to break down that barrier and help you to integrate your thinking.
Skilled staff members use financial data to track program results and assess their cost-effectiveness and overall effectiveness compared to other options. For example, how much does it cost per subscriber to produce this magazine—and how does that compare to similar publications? Sharing these data with trustees helps them provide appropriate oversight. If you can’t track and measure your impact, how will you know whether you’re doing the real work? How will you know if your work is working, or if you’re using the funds as effectively as you’d like?
Myth 2. Only people who understand finances need to look at the numbers. Maybe you don’t know anything about electricity, but you’re smart enough to call an electrician when the lights go out. Throwing a party for fifty people? Find a good caterer. Planning your retirement? Hey, professionals can help with that.
In each of these situations, you don’t have to solve the problem yourself, but you need to know enough to be concerned, be engaged, and ask good questions. For example: Am I using too many appliances at the same time? If we feed everyone hamburgers, how much will it cost? How much money do I need to save and invest each month?
You don’t need to be a CPA or a financial genius to be an effective trustee. However, you’ll want enough basic wisdom to participate in the financial discussions, affirm good decisions, and raise concerns. Several good questions are outlined earlier in this article; for example, “What are our biggest financial risks —and what are we doing to manage those risks?”
Myth 3. My questions are so basic (and dumb). I’ll look foolish asking them. Effective leaders don’t know all the answers, but they insist on asking the questions necessary to get those answers. Organizations fail for a multitude of reasons, but never because someone asked too many questions. Sometimes they fail because no one asked enough questions early enough to uncover and address the underlying problems.
Myth 4. I don’t understand the language; therefore I can’t understand the concepts. As we suggested earlier, you know more than you realize. If you know you don’t have enough mon-ey to pay the rent or staff salaries until that major donor pledge is received and deposited in the bank, then you understand the principle of cash flow. You know Dad will send you $50 every year on your birthday; that’s an account receivable. The $1200 you owe on your credit card (and why did you buy that new sofa)? Accounts payable. How about if your expenses are greater than the money you bring in each month? That’s what you learn from a statement of activities.
This magazine was founded on the principle that everyone, regardless of job title or social class or educational background, can learn to be an effective fundraiser. We’d like to offer a friendly amendment: everyone—even the financially phobic—can (and should) learn the basics of financial management. Here’s the good news: you already know more than you realize. ■