By James M. Vaughn, Vice President of Finance, Taylor Communications, Inc. and Dayton Foundation Governing Board Member
From planning your annual budget to setting up protections from fraud, keeping your board members informed should be a top priority for your nonprofit organization. The following are ten highlights from my presentation at The Dayton Foundation’s recent Nonprofit Connections Live event, which will help your board effectively serve during their tenure with your organization.
- A significant difference between a nonprofit organization and a for-profit organization is that a nonprofit organization does not have an owner. Thus, the board of a nonprofit organization serves the role of an owner, providing oversight and ensuring accountability to its donors and mission.
- Appointing individuals who have financial expertise to serve on a nonprofit board is essential to your organization’s operations. This ensures accurate reporting, strong controls, meaningful financial planning, investment oversight and adequate funding/liquidity.
- Nonprofit organizations are not bound to GAAP (generally accepted accounting principles) and are not always required to undergo audits. As a result, there is a great deal of flexibility in how statements are pulled together.
- All nonprofit organizations should issue a complete set of financial statements, including a Statement of Activities (i.e., an income statement), balance sheet, cash flow statement and accompanying footnotes. These collective statements tell the organization’s story. It is essential that the board be intensely curious about these statements, particularly given the flexibility in reporting.
- Financial planning is important to ensure adequate funding for the mission over both the short and long term and should include an annual budget and a three-year strategic plan. Accountants often are criticized for focusing on what has already occurred. A good financial professional, however, can use historical financial statements to project forward to ensure that goals and the mission are properly funded.
- You must fund the overhead of your organization before funding the mission. A good comparison is when a flight attendant describes emergency procedures to passengers, stressing that one must put on their own oxygen mask before tending to their loved ones. It is essential that the board focuses on funding the organization’s overhead so that the good work toward the mission can continue. Don’t apologize for funding your overhead!
- All nonprofit organizations should have an investment policy that ensures the asset allocation matches the intended use of the assets. Asset allocation is the most important determinant of returns over the long term. Trust your investment advisor and make sure your investment strategy matches your liquidity needs.
- A good rule of thumb for endowed assets is that roughly three to five percent can be spent annually to preserve the principal for the long term.
- Nonprofit organizations are often small, making it a challenge to have good internal controls, such as segregation of duties, dual signatures and controlled access to bank accounts. Audits and reconciliations are great internal control tools.
- If your organization is experiencing rapid growth in restricted assets but has an underlying problem funding operational costs, delve into your financial statements. Thoroughly reviewing them can help you understand why funding overhead is so important.
For more articles and resources on how to help your nonprofit organization thrive, visit https://www.daytonfoundation.org/nonprofit-connections.