It’s been a tough year for nonprofits. Many have experienced an increased demand for services just as revenues have plummeted. Until the COVID-19 pandemic is over, your organization’s board of directors will likely play a special role in ensuring that it remains on track financially. In particular, the board should focus on two issues:
1. Budget variances
Each month, the board should compare your nonprofit’s budget to actual results and look for unexplained variances. Some discrepancies are bound to happen in this tumultuous time, but your staff should be able to explain all significant differences thoroughly.
There may be reasonable explanations for changes in incoming revenue and expenses, such as increased program demands, funding changes or event cancellations. When necessary, the board should direct management to modify activities to mitigate negative variances or institute cost-saving measures. Board members also should keep an eye open for overspending in one program that’s funded by another. And they should watch for dips in the organization’s “rainy day” fund (its “reserves”), the raiding of an endowment or unplanned borrowing.
2. Consistency of financial statements
Inconsistent financial statements — or statements that aren’t prepared using U.S. Generally Accepted Accounting Principles (GAAP) — can lead to poor decision-making. It also can make it difficult to obtain funding or financing or compare your organization’s metrics to those of other nonprofits in the same niche. If your organization isn’t using GAAP (or another comprehensive basis of accounting), it may be time to implement it.
For larger nonprofits, the board or audit committee also should insist on annual audits and expect to select the audit firm. Members of the responsible group, such as an audit committee, should communicate directly with auditors before and during the process. All board members should have the opportunity to review and question the audit report.
Additionally, your audit firm may provide a management comment letter that reflects issues noted during the audit and opportunities for improvements in accounting, internal controls and operations. The board should carefully consider these recommendations and determine if suggested changes will lead your organization to a stronger financial footing.
Other warning signs
Your board should also be alert to other potentially troubling signs — for example, if members start hearing from long-standing supporters who are worried about your nonprofit’s finances. Also, the board should make sure that your executive director adheres to expense limits, even if a program’s needs unexpectedly expand. Going outside of budget or policy guidelines should require board approval.
Contact us for additional advice about your board’s fiscal role and for help restoring financial order following a disruptive period.