So, imagine this:
You’re a board member, and you’ve just been given a quarter-inch thick packet of financial tables and charts. They’re on legal size paper, and the font point size is 8. There are pages and pages, monthly and annual figures, budgets, actuals, totals and subtotals and sub-subtotals, and lots of bright colors. It’s mind-boggling, and you don’t know where to start. You listen to the explanation, and it isn’t helping much—in fact, it’s hard even to figure out which table the speaker is referring to.
Is this how you feel when it's time to review your nonprofit's Financials?
You realize that a board member should be on top of the organization’s finances. Looking around the room, you assume the other board members are following things. They have no questions, so everything must be clear to them. Exasperated, you tune out, and eagerly await the next agenda item.
If this sound familiar, guess what? The rest of the board had the same reaction; that’s why they had no questions. The presentation, both on paper and through explanation, was opaque. Four out of five boards have this experience. (And the fifth doesn’t get any financial information at all.)
Ok, I exaggerate, but not by much. It’s tempting for people to think “I’m not a finance person,” and simply delegate that area of responsibility to others who are. But that’s wrong, and I’ll tell you why:
First, you are a finance person. You make money and buy things, run a household, own bank accounts and balance your checkbook. Most organizations’ finances are not too different from that, when it comes right down to it.
Second, if you assume someone else is on top of this, and all of the “someone elses” are thinking the same thing, well, you see where I’m going with this…
Third, in this example (which is not atypical), the way the figures are presented is part of the problem.
There’s a myth in our culture that more information is better. (In this country, more of pretty much everything is considered better.) More can be better, but only to a point. If you know nothing, you’re usually at a disadvantage. But if you are overloaded with information, you may be worse off than knowing nothing (the reason being that blissful ignorance is less stressful). You don’t need more information, you need the right information. And you need the mental space to be able to digest it.
Financial data is usually dished out in immense servings. Like overeating, it leads to heartburn and high blood pressure. It also obstructs the only worthy purpose for distributing the data in the first place—building an understanding of what’s going on. The essence is buried in clutter.
Here’s the little secret about financial data: Less actually is more. You only need to know a few select things. The irony is that the monster reports described above not only have lots of useless muck, they often exclude some of the few select things you really need. Like an all-you-can-eat buffet with 12 types of starch and no green veggies.
Here’s what you need to know:
What’s our plan?
This is the budget, which is essentially the organization’s operating and financial plan for a given year. Board members should review and discuss the budget proposal, understand how the budget will help accomplish mission-related goals, and the assumptions behind it. Wide-eyed assumptions should raise flags, as should a patchwork approach in which the organization will be limping to the finish line. It’s much more important for a board member to look at the bigger picture than get mired in the details.
How are we doing relative to our plan?
The board needs to know how the organization is tracking on the budget, from 5,000 feet above. Are we on or off track? If off track, why, and what are we going to do about it? All you really need to look at is the year-to-date bottom line compared to the plan, and the projected year-end bottom line compared to the budget’s bottom line. After seeing those two comparisons, it’s better to ask questions and understand the story than to rake through the leaves.
What’s the state of our financial health?
Four pieces of data tell you 90% of what you need to know about the organization’s health: the unrestricted cash reserve (which should normally be at least one quarter of the annual operating expense budget); the ratio of current assets to current liabilities on the balance sheet (this should normally be two or better); the projected profit or loss for the current year (here, more usually is better); and the projected cash reserve over the next 12 months (look out for valleys). If you get these four things, you have permission to skip the rest—and you’ll still be one of the financial wizards in the room.
What risks do we face?
Risks often don’t show up on any financial statement—so the reams can’t help. The biggest financial risks for many organizations surround future revenues: what if something we’ve anticipated doesn’t happen? Board members should ask for, discuss and understand what the risks are. Rosy forecasts that assume everything will go right may not reflect the real world, and the discussion may be more valuable than a chart.
Is our management up to code?
Most nonprofits are well managed, but board members have a duty to make sure this is the case. An audit or some other third-party review is essential on an annual basis. The auditor’s management letter may be more important than the numbers in the report. Again, it’s the story that’s important: Are we meeting standards, and if not, what’s the deal? Is this a money-making or money-losing venture? What’s trending? Are there any flags?
Management and the Finance Committee can be masters of the details. Most board members really only need to know a handful of key figures and the overall trajectory of the organization’s finances.
My advice is to be sure you have the key pieces of information, spend your scarce time there, and ask the questions that come out of this limited examination. Then you should go home and sleep soundly.
I also suggest you recycle that colossal mega-report. What a waste of trees…
Image Source: Vikulin - Shutterstock.