Increasing Your Board’s Financial Literacy

Financial literacy is one of those buzz terms that many nonprofits use when prospecting for board members. The goal is usually to find nonprofit board members who can read financial reports without breaking a sweat and adopt budgets that will serve nonprofits well. But as we head into 2012, is it enough to focus on just the numbers?

In this challenging environment, being aware of sector wide trends is also a skill that boards need. Specifically, understanding what impacts a nonprofit’s cash flow and taking a critical look at a variety of scenarios, including shifts in a nonprofit’s traditional revenues sources, or even the possibility that a nonprofit may merge, is important.

A recent study, Financial Literacy and Knowledge in the Nonprofit Sector, suggests that a broader definition of “financial literacy” is needed. The report from the Center on Philanthropy at Indiana University exposes that board members are least likely to have a command of scenario planning, or the ability to analyze a potential merger, or debt restructuring, and that almost one third of those surveyed describe themselves as “novices” in understanding trends in the nonprofit sector (as opposed to either “knowledgeable” or “expert.”) Also, not surprising but still alarming, among the 500 nonprofit CEOs, CFOs and board members surveyed, those from smaller organizations (under $1 million) were less likely to be able to answer three basic questions about economics, and among those same small organizations, operating reserves are dangerously low: 45% reported less than 3 months of operating reserves and 28% reported less than the optimal 4-6 months in reserve. These findings collectively underscore the concern that in the current economic environment the boards of the smallest nonprofits (the majority of the sector) are not well positioned to avoid and survive a cash flow crisis or a shift in the nonprofit’s usual income streams.

The report also observes:

• * Board orientations typically include sharing a copy of the ethics or conflict of interest policy, but less commonly the financial risk management policies (such as those addressing internal controls).
• * Boards typically review a budget that shows the variance between actual income/expenses and the budgeted amounts, but they are less commonly engaged in scenario planning that takes into account future potential outcomes affecting cash flow; and
• * While the majority (66%) of the nonprofits responded that their boards were “involved in financial accountability” only 26% reported that those same boards were actively engaged in fundraising for the nonprofit.

There is no question that we need board and staff members to be able to recognize sector trends and how those trends impact their organizations. We also need board members to be financially accountable for oversight of financial risk management policies, and to be able to read the narrative created by income/expense reports. As your organization plans its next orientation for new board members, look for ways to share resources that will help your board be ready to meet the challenges ahead.

10 Resources to Increase the Financial Literacy of Board and Staff:

• * The National Council’s webpage offering resources on financial management is a good place to start.
• * Help board members understand their oversight role for internal controls; Explore these suggestions for internal controls appropriate for a very small nonprofit.
• * The Scenario Planning Worksheet developed by the Nonprofits Assistance Fund is a step-by-step guide to contingency planning that can help boards and staff make informed budget and management decisions based on different scenarios.
• * Goodies for board orientations: Glossary of financial terms; cheat sheet on balance sheets, characteristics of financially healthy nonprofits, how to manage restricted funds.
• * Both board and staff can benefit from completing this short Financial Management Self-Assessment Tool developed by the Nonprofit Association of Oregon.
• * A cash flow template can be a helpful dashboard at board meetings.
• * Share the past year’s IRS Form 990 and help board members understand what it means.
• * How much cash should be in reserve? Check out these resources from the Nonprofits Assistance Fund: Operating Reserves Overview and Policy Example and  Maintaining Nonprofit Operating Reserves, that explain the concept of an operating reserve ratio.

Finally, being aware of trends that impact a nonprofit’s financial resources is an important component of financial literacy: Board members need to know what’s happening in the broader nonprofit environment, particularly in their state, so they can understand the implications for their particular nonprofit. Help your board members stay abreast of trends that impact nonprofits by introducing them to free e-newsletters, such as the newsletter of your State Association of nonprofits (MANP!), Nonprofit Quarterly’s Nonprofit Newswire, Guidestar, and the National Council of Nonprofit’s e-newsletters.

Looking ahead, what are your nonprofit’s biggest challenges for 2012? Please let us know so we can stay on top of the trends that will help your organization navigate the challenges ahead.

This article reprinted with permission from Nonprofit Knowledge Matters, a publication of the National Council of Nonprofits.

For additional resources on Financial Management from MANP, check out:

• * MANP’s Nonprofit Financial Management Guide
• * Our online Resource Library’s section on financial management
• * The financial management section of MANP’s Guiding Principles & Practices for Nonprofit Excellence in Maine
• * Upcoming SkillBuilders on financial management