Help Your Board be More Accountable and Effective

One of the key challenges many chief financial officers face is how to present meaningful information to board members who each have different talents and backgrounds. A not-for-profit board of directors has a fiduciary responsibility to act in the best interests of the Organization. Among the many duties of the board is to carry out financial oversight. Board members must understand the important financial issues related to the Organization in order to carry out their oversight duties. After all, it is the board's responsibility to approve all material commitments of funds or other resources. This article covers elements of the financial reporting process, and how to involve your board in those items.

Create a Policies and Procedures Manual
Before an Organization can prepare meaningful financial reports, there must be a comprehensive accounting system established for the collection and processing of financial data. Policies and procedures, including controls, should be formally documented in an accounting policies and procedures manual. Some of the major items a manual should cover include:

• Cash receipts
  • Processing
  • Segregation of duties
• Purchasing
  • Procurement guidelines
  • Competitive bidding
• Accounts payable
  • Hierarchy of approval
  • Thresholds for dual check signature
• Financial reporting standards

What Information Should be Included on Financial Reports
Meaningful financial reporting to your board often involves various steps. The most important thing in developing reports for your board is to consider what will be meaningful to the board members. The reports should be designed so that the formats correspond to the strategic plan of the Organization. In addition, the information should be presented in a format that is similar to the format used by your auditors. This eliminates confusion for board members when trying to reconcile monthly reports to the year end audit. Here is a summary of certain financial reports that are often the most important to a board of directors:

Budgets - In order for the board to make decisions as to the future operations of the Organization, it is essential that budgets be prepared and approved by the board well before the start of the fiscal year. The budgeting process is the Organization's opportunity to translate its strategic plan into concrete monetary and financial goals. The process for developing the budget includes planning, research and preparation. When developing the budget, an assessment of past results needs to be integrated with current operating conditions. There should be a full analysis of anticipated support and revenue for the year. This forecast should be based on established contracts with funding sources, membership totals, anticipated donations, estimated sales, etc. The development of estimated expenditures is often simpler than the development of support and revenue estimates. It is often a good start to look at last year and then make appropriate corrections for anticipated changes in operations or economic conditions.

Monthly financial reporting - In addition to relevancy and accuracy, one of the most important issues with monthly financial reporting is that the reports are prepared on a timely basis. A realistic goal for many organizations is that monthly reporting is completed within two to three weeks of the month end. As stated above, it is essential that the monthly reports reflect the issues the board deems meaningful. Some of the elements common to most board presentations include:

• Balance sheet
• Statement of activities
• Detail supporting schedules for the statements
• Comparison of current results to budget
• Notes that discuss significant variances from budget, and funds remaining to be spent
• Cash flow projections for the next month to year

Key financial indicators - Often board members also find it beneficial to review summarized financial information and indicators. These reports can be prepared from your monthly financial reports and might include key financial indicators such as cash, support, compensation, etc. The Finance Committee of the board could develop these indicators, so that a "flash" type report is available for the month. It is often helpful to board members to calculate relevant financial ratios for the Organization. Depending on the nature of the Organization, some of these ratios might include:

• Accounts receivable turnover
• Accounts receivable aging analysis
• Inventory turnover
• Average return on investments
• Percentage of functional expense items to total expenses
• Contributed dollars vs. earned program revenue as a percentage of total support and revenue

As your Organization develops and implements, or refines, a financial reporting process, you may find it useful to develop workshops to educate the board on the report formats and relevance of the information. These informal sessions will help to insure that all members of the board understand and are able to interpret the internal and year-end audited financial statements.

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