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:
- 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.
- The “Dreaded” Balance Sheet – which summarizes the value of what the organization owns, compared to what it owes.
- 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.