If you’re a financial professional, it’s likely that you’ll be asked to be the treasurer of the board. Many of the duties of the treasurer are conducted via a finance committee, so I’ll cover the roles of both the treasurer and the finance committee in this lesson. Since they overlap so much, I’ll talk about the finance committee. When I do, I’m referring both to the roles of the treasurer and the finance committee. Some nonprofits also have a separate audit committee, which I discuss in another post.
The finance committee leads the board’s financial oversight of the organization. The duties and responsibilities of the board treasurer and the finance committee are listed in the bylaws. The finance committee may also have a separate charter to provide details of its duties.
The finance committee is usually led by the treasurer. The committee is comprised of board members but may also include people who aren’t on the board. Inviting non-board members is a good way to develop future board members and treasurers.
Below are some key roles of the treasurer and finance committee.
Financial Report Review
In the smallest of nonprofits, the treasurer may do the bookkeeping and prepare the reports for the board. Other small nonprofits have a bookkeeper who does the basic entry to the accounting system. This system then produces the basic financial statements. The bookkeeper or treasurer may then supplement that with other financial reports. In mid-size to large organizations, staff prepare the board financial reports and may also report to the finance committee and/or the board.
A financial professional can help identify the important numbers that should be monitored by the finance committee and the board. The finance committee will likely look at financial reports in more detail, ask more questions about the reports, and spend more time discussing implications and decisions than the full board.
It’s not uncommon for the financial leader of the nonprofit’s staff to present the financial reports to the finance committee, and then the treasurer reports a summary to the full board. The treasurer thus acts as a translator from the detailed and technical reports to a summary that explains key financial information that’s understandable by a diverse board with varying levels of financial expertise. A treasurer needs to be strong with numbers and a good communicator. That last sentence may be redundant because financial reports are, in essence, communication that uses numbers instead of letters as the form of communication.
Once again, the treasurer must set a tone that allows other board members to feel comfortable asking questions or requesting explanations about financial reports or activities of the finance committee. I’ve been asked some great questions by board members that really made me think. I’ve also learned that I have to really understand something in the finance committee to clearly communicate it in simple terms to the full board.
Financial Policy Development
Nonprofits have many policies that touch on financial management. These include:
- Conflict of interest policy
- Debt policy
- Expense reimbursement policy
- Whistleblower policy
- Gift acceptance policy
- Grant management policy
- Investment and cash management policy
These are developed by the finance committee in consultation with the organization’s staff. These policies explain the authority of staff and which authorizations require board approval.
These policies should also set minimum ratios for sound financial management. For example, the policy may set:
- The minimum cash reserves to be maintained at all times
- A minimum current ratio
- Maximum debt amounts
- Concentration limit from any single funding source
The limits in the policy are ratios that would be true for good financial management for all years. Ratios scale with the organization. Fixed dollar amounts don’t. In other words, a cash reserve of three months of expense is a ratio that allows the reserve to scale with company growth, while a policy limit of $100,000 of cash may be too small as the organization grows.
The board or staff may set other financial targets from year to year. These targets and policy limits can be monitored on a financial dashboard. Dashboards often compare actual results to target amounts. The variances between actual and target are accompanied by colors or symbols that indicate good or bad performance. For example, a green dot signifies that the targets are being met. A red dot means they aren’t.
The beauty of a dashboard is that it quickly communicates information that helps all board members exercise their oversight responsibilities. The treasurer and finance committee has the expertise to set the targets. Other board members may not have that expertise, but they know that the board needs to address an issue if the monitoring reports show a red dot.
Another key report at many companies is the budget-to-actual report. Many people monitor the variances in this report to assess company performance. The problem with these reports is that they lose relevance over time. Budgets are a collection of guesses. Many of those guesses prove to be wrong six months into the year. Once again, that’s why managing performance via ratios is more flexible and effective. Check out my budgeting courses and my rolling forecasts course for more thoughts on budgeting and alternatives to budgeting.
Some companies only present the standard financial statements. The statement of activities might be compared to the budget. There is no financial dashboard. The committee and board then spend a great deal of time subjectively assessing whether performance is acceptable. This is ineffective, reactive, and inefficient. It reminds me of when Supreme Court Justice Potter Stewart said he couldn’t define pornography but stated, “I know it when I see it.”
It’s important for a finance committee to objectively define aspects of good financial management and performance. That is then memorialized in policy. Board members are constantly joining and leaving the board. The financial policies train new members and prevent the committee from wasting time trying to remember or re-create definitions of what’s acceptable.
Reviewing the Annual Budget
The annual budget is a way that many boards set financial performance expectations for the next year. Some leadership may have bonuses tied to it. For example, some staff may have performance targets to achieve funding levels in the budget. As noted earlier, the finance committee may monitor budget-to-actual reports throughout the year.
Procedurally, the committee reviews the budget and then recommends it for approval by the full board. Some finance committee members may think this is the most important financial vote of the board each year.
In other nonprofits, the budget isn’t approved by the board. It’s considered a tool primarily for management. The board provides guidance via policy limits, as I describe above. The budget and later actual performance should meet those policy limits. If they don’t, noncompliance will be brought to the attention of the board. This is a concept from the Carver Policy Governance model. You can check out carvergovernance.com for more information. I’ve been on Carver boards and worked for a nonprofit that implemented it. It was beneficial in delineating the roles of management and the board. Interestingly, we had grants that required that the board approve the budget, so we would vote to “affirm” the budget to comply with the grants and still stay consistent with the Carver model.
Financial Decisions and Approvals
Boards often require that major financial decisions require board approval. Examples of these decisions include real estate transactions, mergers, and taking out loans.
Other discussions may center around how the organization might stay within or get back within the policy targets of good financial management if it’s trending away from those targets.
Organizations face many financial opportunities and challenges throughout the year, for which a financial professional can provide guidance and insights. The temptation of some is to cross the line from oversight as a board member to management, which is the role of the staff. It’s true that in very small nonprofits, the board is a “working board” that may perform both oversight and implementation. For larger organizations, the boundary between the board and management must be respected. We finance types can be comfortable getting into the details. That can lead to detailed oversight or, at its worst, micromanagement.
I want to take a moment to provide a warning about a dynamic that can occur between financial experts on a board and staff. In this scenario, the CEO and CFO of the nonprofit disagree on a financial decision. The decision may be about whether to take a type of funds, how to use funds, or how to record a transaction. Their disagreement creates a deadlock between them. The vote count between them is one and one. So, one of them contacts the finance expert to “see what they think” about the decision, but it is often an attempt to get the finance expert to cast the tie-breaking vote to break the deadlock. Another strategy is for the CEO to ask the treasurer to “talk with the CFO” about the issue (or for the CFO to ask the treasurer to talk to the CEO). Do not get sucked into this coalition building and triangulation. If it’s a management decision, the CEO and CFO need to reach a decision between themselves. If it needs to escalate beyond them, they can both meet with the finance committee, the audit committee, or the full board to arrive at a decision.
Insurance Review
A good practice is for the finance committee or the audit committee to review the company’s insurance policies at least annually. One purpose of this is to ensure that proper coverage limits are being maintained. The other is to ensure that the insurance carriers are still highly rated. The company’s insurance agent may join the finance committee or board to discuss this. Once again, some boards review the policies and ratings, and other boards set limits and ratings in policy, and the staff just report that they are in compliance with the policy.
Investments
Some not-for-profit organizations, such as endowments and foundations, have large amounts of investments. These organizations may have a separate investment committee. Other organizations may have the finance committee oversee investments.
I was on the board of directors of a nonprofit that had investments. We also had a related foundation with investments. Once a year, the finance committee of the nonprofit and the foundation board met together with the investment managers. These meetings had multiple purposes:
- Assess the performance of the investments
- Review the fees of the investment managers
- Assess our satisfaction with the investment managers
If your organization has investments, you should be aware of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). To learn more about this, check out the Uniform Law Commission site or check your state’s laws. You may want to include aspects of this law in your policies.
Cash Management
Some nonprofit organizations work with tight budgets and low cash reserves. Good cash management is crucially important so they don’t run out of money.
Government grant sources can sometimes have large delays in sending funds. The nonprofit must be ready for this. Some grantors allow a nonprofit to take funds before expending them for the purposes of the grant. The organization should make sure these funds are kept set aside for the grant’s purposes.
A nonprofit may also be accumulating cash above what was budgeted. The finance committee or board can decide whether to put this excess cash into reserves or whether to invest it into the mission of the organization. Nonprofits don’t have owners who want dividends or draws from the company, so organizations are always asking what the best use of cash is to serve their mission.
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