Fiscal Responsibility Primary Goal of Board of Directors

January 26, 2015

Although each board’s involvement in its not-for-profit agency’s operations varies from situation to situation, all boards share a mandate to exercise fiscal responsibility.

Certainly, complying with self-dealing rules and following the letter of the bylaws are requirements of fiscal responsibility. But they may be just the minimum requirements.

Here are three ways for boards to further exercise their fiscal responsibility.

1. Assure the agency stays within its budget

Prepare a realistic budget. It is always appropriate to budget based upon educated estimates of the actual costs and revenues of intended services. But these estimates should not ignore the history of the budget item. Neither history nor the estimate should stand as the lone criterion of a budget item.

Justify the budget variances. At each board meeting, receive a report from staff on actual expenditures compared to budget. Significant variances – say, 10 percent or greater – should be explained.

A plan should be presented to bring the budgeted item back into line to accomplish the agency’s budget goals for the year. While it is important to correct unfavorable variances – spending too much – do not overlook under-spending. Money not spent as planned, such as advertising or program development costs, may result in revenues missing budget later in the period.

Adjust the budget when needed. Occasionally, the budgeted items may prove invalid. A program may not begin because of permitting or personnel issues. A major event may disrupt revenues or require overtime. When this happens, create a new budget for the remainder of the period with these events taken into consideration. The budget for unaffected line items remains unchanged. Then, once again, the agency is working with an achievable budget.

2. Secure the future with good practices

Ensure the lines of responsibility are clearly drawn. An agency’s bylaws often define how much an executive director can spend without board approval. Are these amounts as practical now as when the bylaw was originally written? If the executive director is permitted to operate outside the budget, there should be a mechanism to control this spending.

If the agency is a membership organization, review the membership recruitment policies to assure the organization is self-perpetuating.

Assess the board’s make-up to assure its members include those who routinely look into the future such as financial planners, public relations professionals and young people.

On both the board and the staff, identify key positions, and then identify one or more other people who might be able to assume each of those roles should the key positions become vacant for any reason. When appropriate, include these people in the planning processes. Good staffers in key positions tend to be promoted, and board members’ terms expire. Planning for successors now will prevent lost ground later.

3. Balance risk with reward

With a qualified financial planner, review the agency’s capital structure. Make sure balances in real estate, endowment and cash are appropriate. Inspect the agency’s capital assets such as buildings and equipment to assure functionality, serviceability and longevity.

Comparatively evaluate the agency’s funding sources. Are program fees in appropriate ratio to program costs when compared to others in your industry? Is there an unfavorable dependence on earnings from unrelated business activities?

Verify the long-term potential of the agency’s programs by picturing the client base and the funding sources in five years or so. Are they secure? Will either grow or shrink dramatically? Plan for the changes.

Insurance coverage is important to examine. Look at recent claims for other nonprofits in your industry. Make sure your coverage would allow the agency to withstand a claim while continuing its mission. Conversely, make sure the agency isn’t excessively covered.

Looking beyond operational issues is sometimes challenging for board members who often are more concerned with monthly meetings and fund-raising.