Board Member Basics: Fiduciary Financial Responsibilty

We can help you setup and maintain your non-profit organization's tax-exempt status by handling all the IRS reporting for you.

Each year the IRS requires most tax-exempt organizations to submit the Form 990 and its relations, which includes the following items.

Board Member Basics:

Fiduciary Financial Responsibility

As a board member, you understand that part of your fiduciary responsibility is to look out for the financial well-being of the organization and crucial to that goal is understanding the financial statements and asking the right questions of the organization management.

What does fiduciary mean?

Fiduciary duty requires board members to stay objective, unselfish, responsible, honest, trustworthy, and efficient. Board members, as stewards of public trust, must always act for the good of the organization, rather than for the benefit of themselves. They need to exercise reasonable care in all decision making, without placing the organization under unnecessary risk.

Understanding of financial basics

Not every board member can be a financial wizard. Every board member, however, needs to be a financial inquisitor. It is essential to understand basic terminology, be able to read financial statements and judge their soundness, and have the capacity to recognize warning signs that might indicate a change in the overall health of the organization. If a board member does not understand something, he or she must be willing to find out the answer.

The Budget:

Approving the budget

The budget creates the framework for program management and overall administrative decisions. The annual budget approval process helps curb any tendency for the board to micromanage. Securing necessary funding is part of a viable budget. Examining financial statements regularly, comparing actual figures to the projected ones, allows the board to verify that the general guidelines stay on track. The board should question any major variances.

Non-profit organizations have three basic sources of funds - earned income and contributed income. Earned income includes items such as fees for services and investment income. Contributed income includes items like donations, sponsorships and grants.

Non-profit organizations have three basic uses of funds - programs, administration and fund raising. Administrative expenses are those costs associated with having the organization "open for business'' before any programs are initiated. These expenses include items like rent, utilities, stationary, phone service, insurance, and some administrative staff. Program expenses are those that would disappear if you would eliminate the program - these types of expenses vary a lot depending on the type of program but often include program staff and program materials. Fundraising expenses are those direct and joint costs associated with getting contributed income.

Some good questions to ask about the budget:

·        For the period, are we budgeting a net income or a net loss?

·        If some of the income we are anticipating doesn't come through, where will we plan to cut the budget?

·        How does this budget compare to previous years' budgets? If we are anticipating more income - are we certain of where that is coming from or just hopeful? If we have increased expenses, why?

·        How much of our income is from contributed income and how much from earned income? The higher the amount from contributed income, generally, the more pressure on board members to help with fundraising.

·        How much of our expense is for program and how much for administration?

Statement of Activity (Profit & Loss):

The statement of activities report is one of the most important tools for carefully watching the funds that flow in and out of your organization. This report details all the income and expenses that you have had for the period and shows you the bottom line. Sometimes (but not always) it will be presented as compared to budget. First, note the period that the statement covers, is it one month, year-to-date or a year-end report?

Then ask the following questions:

·        Do we have a net income or a net loss for the period? If there is a net loss, is it expected? What are we going to do to make up for it next month or quarter?

·        Do we have sufficient cash coming in at this time to cover bills that are due at this time, or have any bills been put off to a later month?

·        Are any of the incomes or expenses significantly greater or less than expected and why?

Statement of Financial Position:

The statement of financial position is a financial snapshot of your organization as it is on a specific date. It lists your assets (good), your liabilities (things you owe) and your organization's net assets.

Some good questions to ask about the statement of financial position:

·        How much cash do we currently have on hand in our checking account? This is the money available for current bills.

·        How much money do we have in reserves or investments? This is the rainy day money that you hope not to get into, but can if it's needed.

·        If the organization has a substantial reserve, is it a simple reserve fund, or is it an endowment? Endowments are restricted so that only earnings and not principal can be used for operating expenses. Reserves are more accessible.

·        If the organization has substantial liabilities, what is the plan for paying them off?

·        How much of the organization's assets are in land, building and equipment? These assets are not liquid and cannot be used for expenses.

Specific questions board members should ask:

·        Is our financial plan consistent with our strategic plan?

·        Is our cash flow projected to be adequate?

·        Do we have sufficient reserves?

·        Are any specific expense areas rising faster than their sources of income?

·        Are we regularly comparing our financial activity with what we have budgeted?

·        Are our expenses appropriate?

·        Do we have the appropriate checks and balances to prevent errors, fraud, and abuse?

·        Are we meeting guidelines and requirements set by our funders?

Setting up and monitoring key financial indicators

Having the proper tools to monitor and evaluate financial performance strengthens the board's capacity to judge the health of the organization. Board members need to agree on general guidelines and standards to measure the effectiveness of organizational accomplishments. Appropriate policies must be in place to guide management and board decision making.

Ensuring adequate control mechanisms

Control mechanisms are not intended to detect fraud but rather to prevent it. Ensuring clarity in job descriptions and responsibilities; defining financial and accounting procedures (signing checks, handling of cash, approving expenses, outlining parameters for credit card usage); managing potential conflicts of interest with a clear policy; and requesting regular external audits are all manifestations of fiduciary responsibility.

Overseeing the organization's legal obligations

The board verifies that all filing requirements and tax obligations are completed. The organization must fill out Form 990 completely and file it on time. It must regularly withhold and pay employment taxes. To avoid intermediate sanctions, the board must document and justify its executive compensation and any financial transactions.

Auditors Report

Most organizations hire an independent auditor to review their financial statements at the end of their fiscal (operating) year. This enables the board to have confidence in the financials that have been presented throughout the year and is often requested for regulatory agencies and donors. Assuming there are no problems found in the audit, the auditors can still be an important asset for establishing good financial management of the organization. The Auditors will prepare a management letter to go along with the audit that will outline procedures or "controls" they recommend to help ensure there is no possibility of mismanagement of funds either by volunteers or staff. These recommendations should be requested and a follow-up should be made to ensure they are initiated.

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