Are you aware of your financial responsibility?

At the risk of sounding melodramatic and starting on a negative note, the threat of insolvency is a very real risk for many NFPs, particularly those who are heavily dependent on funding from a limited number of sources, often government grants and contracts.  All it takes is a change of government, legislation or political whim and the financial security of the organisation is threatened or in some cases completely destroyed.  Take the National Disability Insurance Scheme (NDIS) for example.  Early reports stated the block funding model was to be scrapped completely, which sounded the death knell for any organisation already on shaky financial ground, although as the scheme has rolled out some block funded programs may continue.

In the disability industry in particular, or any sector experiencing significant change, financial accountability is one of the main responsibilities of the board or committee of management, who need to be able to seek information and reports from management and have the ability to assess the data to assure their service uses and other stakeholders that the organisation is financially sound.

Representation on the board of committee of a Not for Profit organisation is a responsibility that should not be taken lightly, and comes with a greater weight and commitment than members sometimes realise.  But it should not be presented so weighty that it scares away members with varied and valued skills in an area not including accounting and finance.

In a nutshell, boards are responsible for the approval of annual budgets and expenditure over pre- specified limits, the appointment and performance evaluation of the CEO, and if necessary the termination of their employment, risk oversight and establishing a risk appetite and ultimately checking the integrity of all financial reports both internal and external such as audits.

An appropriate representation of skills, experience and knowledge is essential for effective board performance and no more so than in the area of fiduciary strength and risk management, particularly when the risk relates to financial viability of the organisation.  Attracting and retaining the right people is essential.

Ideally a well-functioning board requires and functions best with the assistance of an accountant or management expert with strong skills and experience in accounting. This fact alone gives your board integrity and engenders confidence in all stakeholders. The ability to effectively read and interpret financial documentation such as profit and loss statements and audit reports is essential to maintain organisational integrity, services can be delivered, staff wages and entitlements are covered and general operating costs and all debts can be paid.

Some of the key indicators that should be included in board papers on a monthly basis include; reporting on the ratio of administrative expenses as a proportion of funding and against industry recommendations, ratio of expenses versus profit in any fundraising activity, which has a whole different set of legislation and reporting responsibility. Most importantly the cash ratio, current cash on hand versus total liabilities, assets to liabilities ratio and working capital ratio.

If you don’t have a financial or management background and your board representation is for reasons of interest or passion for the organisation and its goals and services your role is highly valued and important, but some of the financial terms and functions may be a new and totally foreign concept.  And that’s ok.  Everyone has an important role to play but a basic understanding of appropriate ratios should really be a minimum requirement for all members as well as belief in the goals and mission of the organisation.