Financial Statements and the Board of Directors: Bravely going where no one has gone before.

Financial Statements and the Board of Directors: Bravely going where no one has gone before.

Every astute Executive Director and Board Chair knows that dreaded moment at their board meetings; when they or the Treasurer present the financial statements, and ask “Are there any questions?”. Suddenly, there is an imminent stillness in the room, eyes glance forward, papers are shuffled in in an attempt to look contemplative, and then silence. A few brave souls ask superficial questions, and then one or two riskier individuals raise their valiant hands to approve these financial documents they fail time and time again to understand.

 

In my years both sitting on and working with nonprofit boards of directors, I can count on one hand the number of directors who truly understand the financial documents presented by their board.  This is not for lack of trying or because these individuals lack intellectual prowess. Indeed, I have been fortunate to sit on and work with some of the brightest minds in the Canadian nonprofit community. But despite this, there is a general fear and distrust of financial documents and how to use them.

There are a multitude of online resources to help board members better navigate this scary territory. The Chartered Professional Accountants (CPA) association (disclaimer—of whom I am a member) has bravely gone where few have entered before and published guides that every board member should read about how to interpret financial documents and the overall responsibilities of a board member.  Other good resources also exist; a simple google search will take you far, but despite the proliferation of websites and guides, people still fear numbers.

Perhaps in the nonprofit sector, we are so used to there never being enough money to do all the things we want, that this fear is well-founded. However, despite the reason for this hatred of financial documents, it is the responsibility of every board member to not only ensure they understand the financial documents, but also the financial commitments of the organization they have elected to be a Board Member for.

 

Executives Directors and Treasurers have an obligation to ensure the documents they put forth are clear, concise and at the level of detail the board expects.  At minimum, each organization should provide its Board of Directors each month with the following:

 

  1. The “Scary” Statement of Profit and Loss (or Income Statement) – this is a statement that identifies the sum of revenues (grants, donations, earnings, etc.), cost of goods sold, and expenses that your organization incurred each month.
  2. The “Dreaded” Balance Sheet – which summarizes the value of what the organization owns, compared to what it owes.
  3. The “Mysterious” cash-flow statement- which, functions much like Sherlock Holmes for tracking changes to the cash of the organization.

 

These three documents constitute the legal minimum that should be provided to a Board of Directors. Some organization opt to give more details, such as a list of expenses or bank balances, but the larger the organization, the more difficult reviewing this document can be.  It is important to remember that the level of detail you provide to a board will greatly influence the degree of involvement they will have. Board members who have clear documents are more likely to ask intelligent questions, rather than simply speak for hopes of ending the torture that normally is the “financial review” section of a board meeting.  A comfortable board director will not question individual purchases, but look for trends that may have changed in how the organization is spending its funds, and intelligently ask “why”.

Over the coming issues, we will examine each of the core financial documents and provide suggestions for how you can make the most of your financial documents and improve the experience for your board of directors.  Hopefully, we can make the dreaded financial review a little less scary.

Social Enterprise and the Role of the Board of Directors

Board of Directors

Social Enterprise and the role of the Board of Directors

While there is much written about social enterprise and the role of Management teams, there is little written about the role of the Boards of Directors. As a board member, one’s role is to direct and protect the organization. While there are different types of boards, the role of a board member is to govern and to manage the risk level of the organization while ensuring its ongoing operation. In many ways social enterprise directly challenges the role of a board member. It creates new organizational risks. It is a departure from the known model of operation into something which may be completely new. It merges traditional public and private sector roles and the “grey” area that it represents in both tax and the law may leave more conservative boards of directors uncomfortable.

Boards, like organizations, are a spectrum. They can be ultra-conservative, to completely open and unorthodox, from structured to relaxed. The culture of a Board goes a long way to determining the culture of the organization. It will determine the latitude given to an Executive Director and team to experiment with new ideas, their aversion or openness to risk, and their ability to challenge the status quote. In short, the culture of a board can determine an organization’s success with social enterprise.

If an organization wants to be successful at social enterprise, they have to create a board and organizational structure that is conducive to this operational structure. All facets of the organization must be organized to support social enterprise activities, from reporting to financial statements, to team roles and responsibilities.   This is because social enterprise is a radical departure from traditional not for profit and charity work. It means adopting market principles and embracing risk, encouraging innovation, design-thinking and a private sector attitude. In spite of all of this, social missions sit at the heart of most organizations and balancing social mission with business principles can oftentimes leave board members confused at best.

 

What is a board member or Executive Director to do? Use the following principles as a starting point for establishing social enterprise in your organization:

 

  1. Establish your mission. What is it that you stand for? If money was no object what would your organization do?

 

  1. Establish social enterprise vision and long-term goals. Why do you want to enter the social enterprise space and what do you want to accomplish?

 

  1. Let your mission and goals guide your strategic discussions. These two items are your compass and map. They will be your “why” you do what you do, and will give you the path to get there.

 

  1. Decide what you sell or do. Most organizations are already businesses. The funders are the customers, and what funders are willing to pay for changes over time. Rather than suffer from mission drift, you have to ensure your organization “sells” something or provides a service that stands the test of time and is fundable by someone.  Social enterprise is simply saying, let’s turn the problem on its head. What do we do well, and what can we offer the public/government that is of value? Why do we exist as an organization should be the principal question driving your discussion.

 

  1. Develop a constraints matrix. Every organization is limited by constraints. If you do not know what those constraints are, you cannot effectively deploy your resources in a way that will bring you the best returns. Ensuring everyone knows the constraints, makes it easier to dedicate resources to particular causes

 

  1. Make your resource inputs match your desired outcomes. I have seen organizations involved in community development focus all their energy on doing a community event. The intended benefit is community building, but entire days and weeks of planning might be involved for an event that could have been organized in few short hours by an experienced event manager. The ideology behind this is that it empowers those involved to learn how to do something through self-discovery, however, the reality is that most of us learn best in teams and particularly if those teams are led by an experienced individual that can guide the project. People in turn, will learn by observing and participating. As they gain experience, they can then, take on additional responsibilities. If the focus is social enterprise, then a proportionate amount of energy has to be put into developing the project compared to what their desired outcome is. Programs can only run if the organization itself exists. Therefore, if social enterprise is the focus, then all activities must connect to social enterprise on some level and drive that mission forward.

 

  1. Change your financial reporting- I cannot tell you how many not for profits give Board Members line by line reporting, copies of bank statements, and transactional level information. A board member, with the exception of a treasurer does not require a copy of every transaction, but rather high level information that will help them see the big picture. Executive directors cannot give a list of expenses to a board and then wonder why the board wants to micro manage.  Give your directors information to match the level of involvement you want them to have.

 

  1. Give them tools to compare. Give them a basis of comparison so they can have standards to make decisions by. How is success measured in your industry and what are examples of other businesses that have achieved success. By giving them a basis of comparison, it makes decision making easier for them.

 

  1. When presenting, don’t give them problems. Give them solutions.  A solution oriented ED is focused on saying–this is the challenge I faced, and this is the decision I made, rather than always seeking board permission. It is easier to start a conversation around the words “what I did”, rather than “what I propose”. What i propose suggests you are seeking their permission. A strong ED, is not afraid of making mistakes, and so does not seek permission, but rather makes decisions and recommendations. I remember once telling an ED that it was easier to beg forgiveness than seek permission. While this is not something I recommend, it is important to remember that being assertive and bold in social enterprise will get you farther than being meek. This does not mean acting irresponsibly, but rather making informed decision and having the courage to stand by them.

 

  1. Do not fear failure. Understand it, calculate it, and then find ways to mitigate it. Always be aware that failure is a reality of any business venture. By definition it is inherent in everything we do.  Focus your energies on fighting and preparing for failure, and you will be farther along than most when it comes to ensuring the success of your venture.

While entire books could be written on this subject, I hope this begins to guide your discussions on the importance of boards and social enterprise  and over the coming issues, we will continue to look at different ways boards can support social enterprise in your organization.