For those who attended the panel discussion on financial management hosted by Internet Securities on June 2, 2005, I thank you for your attendance and include the following supplemental information for your convenience:
Best practices in financial management. We discussed having financial policies governing matters such as internal control procedures, investment of assets, reserve funds, compensation, earned income, and expense account reporting. We also emphasized the importance of board education, particularly with respect to the directors’ fiduciary duties, and having financial expertise on the board. Other best practices include adopting a conflict of interest policy, having a system for ensuring that all filing and reporting requirements are met, and regularly approving financial statements. The following are some additional web resources that you may find useful:
- Checklist to Assess Financial Activities in Nonprofit Organizations (United Way of Minneapolis Area)
- Best Practices for Nonprofits (Whatcom Council of Nonprofits)
- Ten Emerging Principles of Governance of Nonprofit Corporations and Guides to a Safe Harbor (Thomas Silk – see "Articles & Publications" link).
Sarbanes-Oxley Act and its implication to nonprofits. BoardSource has an excellent review here: http://www.boardsource.org/clientfiles/Sarbanes-Oxley.pdf.
Note that there are two provisions directly applicable to nonprofit corporations: (1) whistle-blower protection, and (2) document destruction. Very generally, (1) a nonprofit may not punish a whistleblower for reporting problems even if the claims are unfounded so long as the whistleblower has reasonable belief or suspicion that a fraud exists, and (2) it is a crime to alter, cover-up, falsify or destroy any document to prevent its use in an official proceeding. It is widely recommended that nonprofits develop policies to deal with these issues. The National Council of Nonprofit Associations provides some sample policies here: http://www.ncna.org/index.cfm?fuseaction=Page.viewPage&pageId=429.
Nonprofit Integrity Act. Please review these links from the Attorney General’s website:
Financial Indicators. Efficiency may be measured using factors such as units of service vs. cost; fundraising income vs. expenses; net income in a fee-producing program. Adequacy of financial resources may be evaluated through liquidity ratios (e.g., quick ratio, current ratio); total liabilities (or total assets) vs. net assets; cash flow projections. Significant financial trends may be sought using vertical analysis (line item vs. total revenue or expense, as appropriate) and horizontal analysis (between periods).
In addition, from the income statement (statement of activities): surplus or deficit; budget to actual for revenues and expenses; functional expense ratios (e.g., program expenses/total expenses). From the balance sheet: quick ratio (cash + marketable securities + net accounts receivable / current liabilties); current ratio (current assets/current liabilities). Other indicators include fund balance ratio (unrestricted net assets/total expenses); profit margin (net income/total revenue); return on assets (net income/total assets; return on equity (net income/net assets); debt to equity ratio (total liaiblity/net assets); leverage (total assets/net assets).
It would be useful for board members to understand some of these key concepts. CompassPoint periodically offers financial management courses for nonprofit executives and board members that may be tremendously helpful.
- Alliance for Nonprofit Managment: FAQs – Financial Management
- BoardSource – Nonprofit Essentials
- Panel on the Nonprofit Sector (provides recommendations for U.S. Senate Finance Committee)