Should You Sound The Financial Alarm?
With federal funding cuts on the rise and fears of an economic downturn looming, nonprofit leaders face mounting challenges. If you serve on the board of directors for a nonprofit with shaky finances, the organization’s ability to sustain critical programs — or even stay afloat — could be at serious risk. As a board member, you play a crucial role in safeguarding your nonprofit’s financial health. Stay alert for these key financial red flags:
The Dangers of No Budget — or a Weak One
A missing or poorly crafted budget signals a lack of fiscal discipline. Your board must insist on a comprehensive budget that aligns with the strategies you’ve developed and approved. Without this foundation, your nonprofit risks veering off course financially.
Unexplained Budget Variances
Once a budget is in place, it’s not enough to set it and forget it. Regularly compare budgeted figures to actual results to spot discrepancies. While some variances are inevitable, your nonprofit’s staff should provide clear, reasonable explanations for any significant deviations.
Unusual or Unsustainable Spending Patterns
Be cautious of spending habits that could jeopardize long-term stability. Overspending in one program at the expense of another, dipping into reserves, unplanned borrowing, or tapping into your endowment are all warning signs of a potentially unsustainable financial cycle. Board members must monitor these trends closely.
Inconsistent or Sloppy Financial Statements
Financial statements that are inconsistent, not prepared using U.S. Generally Accepted Accounting Principles (GAAP), or fail to follow another recognized accounting basis can lead to poor decision-making. Worse, they may damage your nonprofit’s reputation, signaling lax internal controls, mismanagement, or even fraud. Ensure your board enforces proper preparation and review of all financial statements.
Delays in Financial Reporting
Timely financial information is critical for effective oversight. Ideally, board members should receive financial statements within 30 days of a period’s close. For larger organizations, engaging an external CPA firm to conduct annual audits is essential. The full board or a designated audit committee should take the lead in selecting the auditing firm to ensure independence and objectivity.
Stakeholder Concerns & Fundraising Red Flags
Financial red flags aren’t always numerical. Pay attention to feedback from stakeholders, especially if long-standing, passionate supporters express doubts about your nonprofit’s financial health. Additionally, take note if your development staff begins reaching out to major donors outside of the usual fundraising cycle — this could indicate underlying financial distress.
Executive Director Overreach
Beware of an executive director who oversteps their authority, such as insisting on selecting an auditor or making strategic and spending decisions without board input. Such behavior may signal dishonesty, instability, or an attempt to obscure financial troubles. Your board must maintain clear oversight and ensure accountability at all levels.
Fulfilling Your Fiduciary Duty
As a board member, your fiduciary responsibilities require you to identify and act on financial red flags promptly. Ignoring these warning signs could jeopardize your nonprofit’s mission and long-term viability. For expert guidance, contact us today. GBQ’s nonprofit services team can review your budget and financial statements, offering tailored strategies to navigate an uncertain future.
Looking for additional financial insight for your nonprofit? Check out these resources:
How To Build Up Your Nonprofit’s Operating Reserves Amid Uncertainty
Effective Cost Allocation For Nonprofits
How To Get Foundations To Say ‘Yes’ To Your Grant Proposals
