Most nonprofits experience the occasional financial misstep or budget shortfall. But if your board members observe multiple or chronic issues like these, they have a responsibility to step in and do everything in their power to address them. Signs of financial distress in a not-for-profit can be subtle. Areas to pay particular attention to include:
- Budget bellwethers. Confirm that proposed budgets are in line with strategies already developed and approved. Once your board has signed off on the budget, monitor it for unexplained variances. Some variances are to be expected, but staff must provide reasonable explanations for significant discrepancies. Where necessary, direct management to mitigate negative variances. One example may be implementing cost-saving measures. Also make sure management is not overspending in one program and funding it by another, dipping into operational reserves, spending from an endowment, or engaging in unplanned borrowing. Such moves might mark the beginning of a financially unsustainable cycle.
- Financial statement flaws. Untimely, inconsistent financial statements or statements that are not prepared using U.S. Generally Accepted Accounting Principles (GAAP) can lead to poor decision-making and undermine your nonprofit’s reputation. They also can make it difficult to obtain funding or financing if deemed necessary. Insist on professionally prepared statements as well as annual audits. Members of your audit committee should communicate directly with auditors before and during the process, and all board members should have the opportunity to review and question the audit report. Require management to provide your board with financial statements within 30 days of the close of a period. Late or inconsistent financials could signal understaffing, poor internal controls, an indifference to proper accounting practices or efforts to conceal.
- Donor doubts. If you start hearing from long-standing supporters that they are losing confidence in your organization’s finances, investigate. Ask supporters what they are seeing or hearing that prompts their concerns. Also note when development staff makes requests from major donors outside of the usual fundraising cycle. These contacts could mean the organization is scrambling for cash.
- Excessive executive power. Even if you have complete faith in your nonprofit’s executive director, do not cede too many responsibilities to him or her. Step in if this executive tries to:
- Choose a new auditor,
- Add board members,
- Ignore expense limits, or
- Make strategic decisions without board input and guidance.
The mere existence of a financial warning sign does not necessarily merit a significant response from your nonprofit’s board, as some problems are correctable. One example would be outsourcing accounting functions if the staff is overworked. However, multiple or chronic issues could call for significant changes.