The Board’s Role in Financial Governance · Members of the board of directors are required by law to play a governance role (as described above) but they are also expected to play

The Board’s Role in Financial Governance

Table of Contents

Today’s Agenda....................................................................................................2 Learning Objectives ..............................................................................................2 True or False: .......................................................................................................3 Why do nonprofits have boards? ..........................................................................4 The 3 Duties: ........................................................................................................5 The Standard of Care: ..........................................................................................5 The Board Reality: ................................................................................................7 Board Fiscal Responsibilities ................................................................................9 Staying protected: Directors’ and Officers’ Insurance ..........................................9 Regulatory Filings ...............................................................................................10 Internal Controls..................................................................................................13 The Audit Committee ..........................................................................................13 Responsibilities of the audit committee...............................................................18 Group Discussion................................................................................................19 The Budgeting Process and the Board’s Role ....................................................19 Steps and Roles in Implementing the Budgeting ................................................25 Group Discussion................................................................................................25 Engaging Your Board and Staff: The Dashboard................................................26 Final Exercise .....................................................................................................32 Resources...........................................................................................................33 Key words and definitions ...................................................................................35 Appendix.............................................................................................................41 Ten Quick Ways to Improve Board Meetings......................................................46

The Board’s Role in Financial Governance Page 1 © 2007 CompassPoint Nonprofit Services

Today’s Agenda I. Board Theory: Legal duties

II. Board Reality: Governance and support

III. Regulatory Filings

IV. Audits

a. Do you need one?

b. Who can be on the audit committee

c. Audit committee requirements

V. Budgeting:

a. The budget process

b. Setting priorities

VI. Communicating your finances

a. Developing a dashboard

Learning Objectives

By the end of this workshop you should:

• Understand the different roles that board members play in the

organization including the legal duties of a board member and their

responsibilities as they relate to the finances of the organization.

• Be familiar with key regulatory filings that are required of nonprofits.

• Know the requirements for an audit committee and obligations of the

board if the organization is required to have an audit under the California

Nonprofit Integrity Act.

• Understand the expectations of the Board of Directors of organizations

that receive funding from the City and County of San Francisco. .

Page 2 The Board’s Role in Financial Governance © 2007 CompassPoint Nonprofit Services

• Understand how a dashboard can be used as a tool for engaging board

members and senior staff in monitoring the key metrics of an

organization.

True or False: 1. Nonprofits are not impacted by the Sarbanes Oxley Act.

2. Nonprofit board members are typically volunteers.

3. Risk management is the primary concern of community-based organizations.

4. Nonprofits most certainly can make a profit.

5. Unlike for profit corporations, nonprofit boards never have to worry about a conflict of interest since they represent the public.

6. State of California law requires that organizations make their audited financial statements public.

7. The Executive Director of an organization is ultimately the person legally responsible for the corporation.

8. Nonprofit boards represent the public’s interests.

9. Nonprofits boards are not involved until the end of the budgeting process.

10. Nonprofits are not as efficient and effective as for profits.

11. The auditor is hired by the Chief Financial Officer of an organization.

12. To demonstrate duty of care, board members should seek advice from outside experts on matters they do not understand.

13. Audit committees can have only one member.

14. The Management Letter of an audit is a private document.

15. Nonprofit board members do NOT need to be financial experts to be engaged in their organization’s finances.


Why do nonprofits have boards?

A group of people sitting around a kitchen table decides to launch a new

organization. Typically such a group would choose to incorporate in order to give

their organization a legal framework. Some nonprofits choose an alternative

route, such as finding a fiscal sponsor. The nonprofit corporation is a separate

legal entity with special privileges and responsibilities.


The members of the Board of Directors of a nonprofit corporation represent the

public. The board acts to ensure that the funds are used for the organization’s

nonprofit purpose, rather than to make the board or staff members wealthier.

The board also acts as the representative of the clients, to ensure that services

are of good quality, appropriate, and accessible. Finally, the board acts as the

representative of the donors, to ensure that funds are spent for the maximum

impact.

The 3 Duties: Legally, according to California corporate law, there are three primary duties that

members of the Board of Directors have. They are:

• Duty of Care: Acting with the same care as would a “reasonably prudent

person” under similar circumstances, in good faith, and in a manner

reasonably believed to be in the best interest of the organization.

• Duty of Loyalty: Not engaging in any activities which would injure or take

advantage of the organization, including self-dealing; and

• Duty of Obedience: Following federal and state statutes, such as laws

prohibiting discrimination, and contractual agreements.

The Standard of Care: While the above duties might be the legal language for the responsibilities of the

Board of Directors, there are certain actions that are looked at in assessing

whether a member met these duties. Taken together these are called “standard

of care guidelines.” These safeguards can do a great deal to protect the

organization, its clients, and the personal assets of individual board members.

They are:


• Act at all times with the benefit of the nonprofit corporation and its charitable

purpose in mind.

• Attend board and committee meetings and make sure your vote is recorded.

A board member can be found liable for either supporting an act of the

board or not opposing an activity – even if he or she is not aware of the

activity due to absence from a meeting. See that a written record of each

board meeting is kept and approved.

• Disclose all possible conflicts of interest, abstain from voting when you feel

that some conflict may exist, and avoid self dealing activities. Discourage

business dealings between board members and the organization.

Having City staff on your board

Sometimes organizations have board members who are either employed by the

City and County of San Francisco or volunteer as a member of a City

commission. This is acceptable, and the City appreciates that its employees and

volunteers are active in their community. Your organization is required to:

• Disclose any paid City employees or members of any City

Commissions on your board roster during your review with City

staff.

• Have the City employees or commission members recuse

themselves during any discussions on the City contract or related to

City business.

• Abstain from voting on any City contracts.

• Document these steps in your minutes.

• Be familiar with the organization’s bylaws, and work to ensure that they are

followed.

• Make sure state, federal and local statutory regulations are met, including

but not limited to filing annual information returns (such as the IRS Form


990), remitting withheld payroll taxes and employer-paid taxes, and

submitting payroll reports.

• Stay informed. Review all program reports carefully; request and review

regular and timely financial statements and other financial reports; ask

questions.

• Seek advice from competent experts, such as lawyers, accountants, and

other professionals in their respective fields.

• See that the organization has a written and up-to-date personnel policy.

• Make sure the organization’s bylaws include an indemnification clause. An

indemnification clause states that the nonprofit organization, within its

financial abilities, will cover most legal fees or judgments against a board

member.

The Board Reality: The reality is that a lot of nonprofit organizations have trouble recruiting,

engaging and sustaining active boards of directors. Part of this is due to the

complexity of the role that boards have to play.

Members of the board of directors are required by law to play a governance role

(as described above) but they are also expected to play a supporting role for the

organization.

These roles are very different in terms of objectives, how they are accomplished

and the responsibilities.

The following matrix outlines these different roles that board members play:


The Board Responsibility Matrix

The Board Responsibility Matrix The board acts to govern the organization The board acts to support the

organization Objectives • To represent the community’s interests within the organization by

making sure the organization is fulfilling its mission, meeting the needs of its constituencies, and operating legally, effectively, and efficiently.

• To represent the organization’s interests in the community by providing necessary individual support to ensure that the organization has sufficient resources to fulfill its mission and is well known/ respected.

Process for action • The board acts as a body (with the assistance of committees) • Board members act as individuals

or through committees MANDATED OR OPTIONAL FUNCTION • Governance fulfills a legal responsibility to the community and as

such is a mandated function. • The level of support expected from

individuals or committees is optional and will vary from organization to organization.

RESPONSIBILITIES • Affirm mission and purpose. • Legal: Ensure compliance with federal, state, and local regulations

and fulfillment of contractual obligations, including payment of payroll taxes and filing of required reports.

• Financial: Safeguard assets from misuse, waste, and embezzlement • E.D: Select the executive director and monitor and evaluate

performance; delegate the day-to-day management to the CEO. If necessary, fire the E.D.

• Planning: Participate with staff in determining program and administrative strategies and overall long-term and short-term priorities.

• Programs: Approve an annual operating plan, monitor implementation, and make sure there are program evaluations to measure impact.

• Efficiency and Impact: Ensure a realistic budget that maximizes use of resources.

• Financial Viability: Make sure the organization has an overall fundraising strategy to support the effective delivery of services, and monitor the implementation of the funding plan.

• Policies: Approve personnel and other policies. Review periodically to ensure policies are up to date and relevant.

• Evaluation: Assess whether the organization is achieving its purpose (effectiveness), at what cost (efficiency), and is meeting the needs of the community.

• Board effectiveness: Ensure effective governance through evaluation of the board itself, committees, and board leadership. Ensure the board’s own continuity.

Personal Commitment: • Fundraising: Participate with staff

in raising adequate financial and other resources.

• Public Relations: Act as

ambassadors to the community on behalf of the organization and its clients.

• Volunteerism: As needed,

volunteer to assist staff, and/or recruit new volunteers.

Professional Expertise: • Advise staff in areas of expertise.

Act as a sounding board for executive director and other executive staff.

Credibility: • Lend names and personal

reputation to the organization to use in brochures, grant proposals, and other marketing materials.


Board Fiscal Responsibilities In addition to the legal responsibilities, there are several important ways board members

can demonstrate their fiscal governance. These include:

• Making sure that the necessary forms are filed accurately and on-time with the

appropriate regulatory agency.

• Hiring an auditor – if the organization has an annual audit – and establishing an

audit committee to carry out the process if the organization falls under the

California Nonprofit Integrity Act.

• Reviewing and approving the annual budget for the organization.

• Monitoring the ongoing operations from a financial perspective by reviewing

financial statements and comparing to budget.

• Approving internal controls and evaluating whether they are being correctly

implemented and followed.

We will take a look at each of these responsibilities shortly.

Staying protected: Directors’ and Officers’ Insurance

One of the ways that board members protect themselves is through Directors’ and

Officers’ Insurance, sometimes called D&O insurance. D&O insurance broadly covers a

“wrongful act,” but policies typically contain a number of exclusions and limitations.

Common exclusions include:

• Sexual misconduct

• Employee Retirement Income Security Act (ERISA) claims

• Fines or penalties

• Tax violations; and


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Demystifying Allocations © 2007 CompassPoint Nonprofit Services

• Criminal acts.

According to the Nonprofit Risk Management Institute, the most common claims stem

from the employment process and most frequently are charges of harassment,

discrimination, or wrongful termination. The vast majority of claims are settled without a

trial, and trial defense costs – even when the defense is successful – can be very high.

One of the key ways to defend against employment claims is to have an up-to-date

personnel policy and make sure that it is followed! If you receive money from the City

and County of San Francisco, you are required to have an up-to-date personnel manual

and have staff trained and knowledgeable regarding personnel policies and procedures.

This is requirement 2i Nonprofit Contractor Review Standard Monitoring Form.

Regulatory Filings In the for-profit sector, there has been much publicity around Sarbanes-Oxley. This is

the federal reform law that was put into place after the Enron scandal which requires

more regulation of financial statements and internal controls. While the law primarily

impacts public companies, there are two provisions which also apply to nonprofits:

• Whistle blower protection: Corporations must have a policy in place to protect

whistle blowers who report fraud.

• Document destruction: Organizations, their directors and management may be

held liable if documents that are relevant to an official inquiry are improperly

destroyed prior to disclosure. A carefully thought out and consistently applied

document retention policy will prove helpful in the rare occasion of a related

official inquiry. We have included a sample document retention policy in the

appendix.

,

There are several state and federal government agencies that require nonprofits to report to them. Most of them

are included in this list below:

Form Agency Required For Deadline Extension?

Form 990 – Return of Organization’s Exempt from Income Tax

Internal Revenue Service

www.irs.gov

Organizations that average more than $25,000 in revenue over 3 years must file Form 990.

Between $25,000 and $100,000 in revenue organizations can file Form 990-EZ.

Beginning in 2008, if you earn less than $25,000 in revenue you must file an “electronic notice.”

Exempt organizations include: Religious organizations and private foundations.

4 ½ months after end of fiscal year

Yes, 2, 3-month extensions are possible. (For a total of 6 months)

FTB 199 – Exempt Organization Annual Information Return

Franchise Tax Board – State of California

www.ftb.ca.gov

Same as Form 990; Organizations that average more than $25,000 in revenue over 3 years.

4 ½ months after end of fiscal year

Yes, a 7 month extension is automatic.


The Board’s Role in Financial Governance © 2007 CompassPoint Nonprofit Services

Form Agency Required For Deadline Extension?

RRF – 1

Registry of Charitable Trusts Annual Registration

State of California Attorney General’s Office

www.ag.ca.gov/charities

Charities in the State of California that are not religious, hospital, educational institutions, cemeteries, or health care service plans.

4 ½ months after end of fiscal year.

Yes, automatic with an extension of the Form 990. Include a copy of approved extension with submission.

A-133 Audit – Audit of nonfederal entities expending federal awards

Federal government Office of Management and Budget

www.whitehouse.gov/omb

Organizations that spend more than $500,000 in federal funds a year no matter how they reach the organization.

9 months after end of fiscal year

Can be agreed to in advance, but rare.

State of California

www.ag.ca.gov/charities

Organizations that receive $2 million or more in non-governmental revenue in any year.

9 months after end of fiscal year

None provided in Act.

Annual Audited Financial Statements

Contracting Agency of Local Government

Organizations that enter into government grants or contracts that require audits.

Per contract or grant agreement.

Per contract or grant agreement.

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Internal Controls Internal controls are processes designed by an organization and approved by the Board

of Directors to provide reasonable assurance of the efficiency and effectiveness of

operations, reliability of financial reporting and compliance with laws and regulations.

Organizations that receive an A-133 audit have their internal controls sufficiently tested

and reported on. The Board of Directors should review this report and take any

corrective action. The City and County of San Francisco during their fiscal monitoring

will ask for your corrective actions for any discrepancies noted during the A-133 audit.

If your organization does not have an A-133 audit, the Board should still routinely review

internal controls and make sure they are being complied with. This can be done by

asking your financial statement auditor, by occasionally looking at documents and

making sure they have appropriate approvals, or by hiring a CPA to provide an external

evaluation of internal controls. evaluation of internal controls.

The Audit Committee The Audit Committee Organizations that are required under the California Nonprofit Integrity Act to have an

audit are also required to have an Audit Committee to conduct the audit.

Organizations that are required under the California Nonprofit Integrity Act to have an

audit are also required to have an Audit Committee to conduct the audit.

Does the California Nonprofit Integrity Act require you to have an audit? Does the California Nonprofit Integrity Act require you to have an audit?

There are two tests to determine if you are required to have an audit: A category test

and a revenue test.

There are two tests to determine if you are required to have an audit: A category test

and a revenue test.

Category Test:Category Test: The California Nonprofit Integrity Act does NOT require the following

types of organizations to have an audit:

• Religious organizations


• Hospitals

• Cemeteries

• Health care service plans

• Schools.

If your organization is not listed, you must take the revenue test.

Under the Act, covered nonprofits with gross revenue of $2 million or more per year, excluding government grants and contracts for services with government agencies that require an accounting for the funds received, must have an annual audit. Calculate your Gross Revenue using this formula: Total Revenue (Line 12 on your IRS Form 990)

Minus: Government grant and contract revenue = Gross Revenue for purposes of eligibility in the Act

Example 1

Gross revenue (Line 12 on Form 990) $4.6 million Minus: Government grants and contract revenue - $1.1 million = Gross revenue for purposes of eligibility in the Act = $3.5 million

This organization is required by the Act to have an audit.

Example 2 Gross revenue (Line 12 on Form 990): $6.5 million Minus: Government grants and contract revenue - $6.1 million = Gross revenue for purposes of eligibility in the Act = $400,000 This organization is not required by the Act to have an audit.

The primary reason for requiring an Audit Committee is to establish an independent

board committee with the responsibility of overseeing the integrity of the organization’s


finances. The committee does this work largely by selecting an auditor and by receiving

and reviewing the audit.

The California Nonprofit Integrity Act borrows from the for-profit sector in requiring audit

committees. Some organizations that already have audits may need to create audit

committees for the first time if they are required by the Act to have an audit. To assure

the independence of the committee, the law lays out who can be on the committee. If

the board has a finance committee, the law draws a sharp separation between the two

committees, with the goal that month-to-month oversight will not influence the

evaluation and maintenance of financial controls.

The Board of Directors appoints the Audit Committee. The California Nonprofit Integrity

Act has specific guidelines as to who can and cannot be on the Committee.


Audit Committee Members

Who can be on it? Who can’t be on it?

Board Members Staff Members (including the Executive

Director and Chief Financial Officer)—

even if they are unpaid but serving in the

capacity of a staff person. The

Committee must be composed of

individuals who are not responsible for

management of the organization.

People who are not on the full Board

of Directors. In particular, your

organization may recruit outside

volunteers with a financial

background for this Committee.

The treasurer of the organization if that

person is also serving as the CFO or

Director of Finance, even if he or she is

unpaid.

The chair of the Finance Committee,

though he or she may not serve as

chair of the Audit Committee.

People who have a material financial

interest in a company that does business

with the organization.

Members of the Finance Committee,

as long as they do not make up more

than half of the total people on the

Committee.

Audit Committee members cannot

receive compensation in excess of the

compensation, if any, received by the

board members for service on the board.

The only requirement for the chair of the Audit Committee is that he or she must not be a member of the Finance Committee.


While the chair of the Audit Committee does not have to be a member of the Board of

Directors, many organizations find it helpful to have the chair on their board so that they

will be present at board meetings and will play an active role in organization

governance.

Organizations will need to modify the bylaws section that addresses board committees

to add the Audit Committee. This can be done by a vote of the Board of Directors.

We’ve included some sample language in the Appendix.

How many people have to be on the Audit Committee?

The law specifies that the Audit Committee can have as a few as one member. Some

organizations find that if they have enough qualified candidates, it is easier to function

with at least three members. Having more than one member helps foster discussion and

different perspectives as well as assuring the ability to function if an individual is not

able to attend a meeting.


Responsibilities of the audit committee While your organization may not be required to have an audit committee, the

responsibilities, as outlined below, should be handled by your Board of Directors. Many

organizations have their finance committee play this role.

The California Nonprofit Integrity Act lists five specific duties for the Audit Committee.

The Audit Committee must:

1. Recommend to the Board of Directors the retention and termination of the

independent auditor;

2. Negotiate the compensation of the auditor on behalf of the board;

3. Meet with the auditor to be assured that the financial affairs of the organization

are in order;

4. Receive, review, and determine whether to accept the audit; and

5. Approve performance of any services outside of the audit rendered by the

auditing firm.

One of the biggest decisions – with or without an audit committee – is deciding who

should audit your organization. In performing this process, many organizations simply

consider the audit fee, but there are several other factors that organizations should

consider including:

• Timeline;

• Continuity from year-to-year;

• Additional consulting services such as completion of the Form 990 and

Management Letter;

• Availability during the year for questions;

• Communication with the Board of Directors; and

• Working style.


Many of these can be determined up-front by performing a Request for Proposals

(“RFP”) to solicit audit firms and interviewing candidates before selecting an auditor.

Group Discussion • What have people tried in terms of recruiting board members with financial

backgrounds?

• How have people gone about finding auditors?

• What kind of success have people had in partnering with their auditors?

The Budgeting Process and the Board’s Role One of the bigger roles that the Board of Directors plays in terms of financial

management is reviewing and approving the annual budget. A successful annual

budgeting process creates a tool for planning and monitoring and is inclusive of many

voices and perspectives.

Planning: The process of building a budget is fundamentally a planning process. In fact,

in the course of planning for its future, an organization will often revisit its purpose,

mission, goals, objectives, strategies, and activities. This is a healthy and necessary

time of annual reflection and one of the primary reasons that the budgeting process

should begin several months before year-end. Even in a relatively straightforward

budgeting process where there seems little doubt about the organization’s overall

direction, the act of determining what the organization wants to accomplish, how much

that will cost, and how the necessary resources will be generated is a form of strategic

planning—if done thoughtfully.

Monitoring: Once adopted, the budget also becomes an essential financial management

tool helpful in monitoring and controlling ongoing organization activities throughout the


year. With each reporting cycle, the organization compares actual performance against

its plan. If the organization has gone “off track,” various responses can be considered.

If, for example, a program is costing more than anticipated, it may be necessary for

management to bring costs down through staff reductions or a freeze on non-personnel

expenses. Or leadership may decide to revise the plan to take the higher level of

expense into account. Using the budget as an ongoing monitoring tool raises these

sorts of strategic discussions at the staff and board levels.

Another guiding principle of budgeting is that to be accurate and effective, the budgeting

process must be inclusive. While the executive director and key finance staff will play

the coordinating role in the process, all management and board members have a role to

play. Unfortunately, for many nonprofit organizations, planning and financial

management are activities that divide rather than unite the organization. Program

planners and fiscal managers speak different languages and often have different

priorities; they may or may not be aware of the importance of each other’s approach to

the budget process. Program planning decisions often are viewed as failing to reflect

economic realities, while fiscal management decisions are often viewed as insensitive to

the programmatic mission of the organization. These conflicts are often fought out

during the budgeting process—the very process that could unite these viewpoints. The

leadership challenge is to insist that these various perspectives are heard and

considered by all parties with the collective goal of developing a realistic and inspiring

plan for the coming year.

Roles/Responsibilities: So what roles do all the players have in an inclusive budgeting

process?

• Board members provide big picture direction and oversight to the process; they

also vet and ultimately approve the final budget. Board approval should be


noted in the minutes. This is also a requirement under the City and County of

San Francisco’s fiscal monitoring procedures.

• Program managers plan for the costs needed to accomplish their program

objectives; in some cases, they are also the best people to plan for program-

generated income. If government contracts or grants are part of the program

revenue, program managers need to be aware of possible changes in the

funding environment.

• Development staff plan for the contributed income that can realistically be

included in the budget as well as the costs they will incur to raise it.

• The finance manager serves as budget manager during the process: collecting

input, building the EXCEL budget workbook, and updating and distributing drafts.

Finance staff also plans for the organization’s administrative and common costs.

Finance staff also should stay apprised of changing trends in cost and

availability of essential resources such as workers comp insurance, employee

health insurance and leased facilities.

• The executive director is akin to a symphony conductor: providing overall

strategic direction and challenging staff to be both creative and disciplined in

their planning. In the best-case scenario, building the budget is truly a team

effort. The ED should also be involved on an ongoing basis with professional

organizations to be aware of any future opportunities or risks related to funding

or legislative mandates.

To be sure, an inclusive process can be a messy one with a great deal of debate and

even frustration at times. The budgeting process is the ideal time each year to bring an

organizational cross-section into the financial leadership effort. The executive director

that creates the budget during an all-nighter before the first board meeting of the year—

or asks her finance manager to do so—is almost guaranteeing a less-than-accurate

plan and a useless tool for controlling financial activity throughout the year. Remember


that is it human nature to respond and feel accountable to a plan you had some say in

developing. In our consulting work with nonprofits, we do not see leaders having much

luck holding program and development staff accountable to budgets they did not

contribute to meaningfully.

There are 5 steps in the budgeting process. The table below summarizes these steps

and who is involved in each one:

Steps and Roles in Planning the Budget

Step Description Finance Development Program Board 1 Define the Planning Context and

Goals

• Review past performance

• Document external environment

• Create annual goals • Articulate program priorities

• • • •

2 Estimate Costs

• Establish budget structure

• Estimate program costs

• Identify and allocate common costs

• •

3 Forecast Income

• Estimate revenue

• Plan for restricted and unrestricted support

• Identify contributions in kind

• Fine-tune fundraising costs

•

4 Strike the Balance

• Create the first draft • Consider contingency plan

• Project cash flow

•



Step Description Finance Development Program Board 5 Approve the Budget •

Depending on the size and complexity of the organization, the entire budget-building

process may require two to four months. The staff person acting as budget manager

should create and distribute a budget calendar with time frames and assignments of

responsibilities for each activity. For a mid-sized organization with a fiscal year

beginning on July 1, a sample budget calendar might include:

April • Board and staff retreat to review performance and develop annual goals

• Program coordinators establish program plan and estimate ‘direct’ program costs

May • Finance manager and executive director estimate common and administrative costs

• Fundraising team creates income plan and estimates fundraising costs

• Management team creates capital budget needed to support program, administrative, and fundraising plans

June • Finance manager prepares cash flow projection

• Management team and finance committee adjust income and expenses, as needed

• Full board approves final budget

July • Management team implements annual plan and budget

• Evaluate budgeting process

October • First Quarter budget review

January • Mid-year budget review (and revision, if needed)

April • Third Quarter budget review

• Begin budget planning for new fiscal year

Ongoing • Monthly review of actual results to program plan and budget

The Board of Directors is most involved at the beginning and end of the process. The

first step is to create annual goals before any numbers are associated with the budget.

This helps establish priorities without the emotional charge that finance often brings.

The board and staff should do this by:

• Reviewing past performance

• Understanding the external environment; and

• Creating annual goals. These may relate to the organization’s strategic or

business plan.

A sample outcome might look as follows:

2007-08 Budget Goals

As of April 15, 2007

Overall Goal 2007-08 Objective

Salary increases to all staff Stabilize programs and ensure highest quality Replace computers and equipment

Increase direct client support

Build cash reserve Improve on key financial health indicators Reduce overhead rate

Obtain line of credit

Increase endowment income Maximize fundraising effectiveness Increase board role in fundraising

Build temporarily restricted balance Maximize cost recovery in foundation grants

These goals are then used when balancing the budget or determining program activities.


Of course, the budgeting process doesn’t stop with the approval of the budget, but continues with monitoring throughout the year. The following table summarizes the steps and roles in implementing the budget:

Steps and Roles in Implementing the Budgeting Step Description Finance Develop Program Board

1 Implement the plan

• Set up accounting system to match budget

• Enter budget into reporting systems

• Categorize income and expenses

•

2 Compare actual results to budget

• • • •

3 Update the projection (and revise the budget)

• • •

4 Approve the revised budget •

Group Discussion

• What is your budgeting process like?

• What are the strengths and challenges of your process?

• How does budgeting for government grants and contracts integrate into your organization’s budgeting process? How does your organization’s budgeting process influence your government contract budgets? How do your government contract budgets influence your organization’s budgeting process?


Engaging Your Board and Staff: The Dashboard Engaging your board and staff in reading and understanding financial information can

be challenging under the best of circumstances. Part of this challenge is that the

information is often presented in an overwhelming manner that is difficult to read and

understand.

The Dashboard of Metrics aims to address this challenge by presenting information in a

clear, concise manner which management and board members can understand,

engage and use to make informed decisions for the organization.

The purpose of the dashboard is to provide an overview of key metrics that

management and the board can easily read on an ongoing basis. Like a dashboard in

the car, a glance at these metrics will tell you how the organization is performing.

However, again just like a dashboard in a car, the metrics do not tell the user where the

organization is going. That is a decision that must be made by the person or people

reading the dashboard.

The process for creating the dashboard consists of 3 steps:

1. Choose the areas or “dials” which you want to monitor;

2. Within each area, decide on 1, 2 or 3 key metrics according to organizational

strategy

3. For each metric, decide on target goals.

An example of the dashboard is included on the next page:


XYZ Nonprofit

Dashboard

For the period ending March 31, 2007

= ACT = WATCH = CELEBRATE

TARGET 1 year ago 6 months ago

1 month ago

this month

PROGAM INDICATORS: Enrollment in training classes

85% of capacity

85%

91% 81% 81%

Average evaluation of participant.

4.0 4.2 4.1 3.9 4.0

FINANCE INDICATORS:

Days of cash on hand

30 24 12 25 26

Surplus or deficit year-to-date versus budget

< 5% 2% 4% 6% 8%

COMPLIANCE INDICATOR:

Federal Form 990 submitted by due date of November 15th

YES No but still before extension deadline

In Yes Not yet due

GOVERNANCE INDICATOR:

Two meetings open to public as part of Sunshine Ordinance

2 by June 30th

2 0 1 1

HUMAN RESOURCES INDICATOR:

Personnel Policy reviewed and up-to-date

Done by March for budget

Not yet started

Started Done


1. Choose the areas or “dials” which you want to monitor.

There are many areas that an organization could create dashboards for. We have

suggested six dials:

• Finance

• Program objectives

• Human resource management

• Compliance and risk management

• Governance and the board

• Fundraising

Each organization can modify the number and types of dials for their own purposes.

Most every organization will have a finance, program and fundraising dial.

2. Within each area, decide on 1, 2 or 3 key metrics according to

organizational strategy.

The goal is to take each area and choose the 1, 2 or 3 metrics that best monitor the

organizational strategy for each area. For example, for finance that might be days of

cash on hand, average account receivable aging and net surplus year-to-date

compared to budget. For fundraising the metrics might be donors visited, new donors

acquired, or foundation grants applied for. The metrics will be specific to each

organization.


What are some of the metrics your organization would want to track for each area?

Finance:

• Days of cash on hand

• Net Surplus/Deficit to budget

• Income or funding diversity

• Payables outstanding

• Accounts Receivable aging

• Others?

Program Objectives

• Youth served

• Customer satisfaction

• Intake calls received

• Others?

Human Resource Management

• Turnover ratio

• Performance evaluations

• Diversity

• Compensation study

• Others?


Compliance & Risk Management

• Form 990 complete

• Sexual harassment training

• Others?

Governance

• Board members attending meetings

• New board members

• Evaluation of executive director

• Others?

Fundraising

• New major donors

• Percent of donors giving 2 years in a row

• Foundation proposals submitted

• Income diversity

• Communication with funders

• Others?

3. For each metric, decide on target goals.

Targets are then set for each of the metrics chosen. Some of the targets, for example

on a compliance issue, will be simply “Yes” or “No.” Other targets should be broken


down into three different categories: the ultimate target, a range slightly below that is

cautionary and a range that requires action. Another way of framing these three ranges

is:

• Celebrate: Colored green on the dashboard; meaning that the organization has

hit the target.

• Watch: Colored yellow on the dashboard; meaning that while not on target it is

close. This does not mean that no action should take place, but that action is

usually done at the staff level to increase performance.

• Act: Colored red on the dashboard. Signifies significantly under the target and

may require action from the board of directors and/or senior management team.

The colors for each section not only help show the trend, but provide the easy at-a-

glance analysis of how the organization is performing.

Many organizations find one of the most useful parts of the dashboard being the

process of choosing the key metrics and agreeing – beforehand – on what the targets

are and how they will be calculated.

There are several questions you may want to answer as part of your implementation plan. They are:

• Who will manage the dashboard document?

• How often will you distribute the dashboard?

• Are there any new systems you need to develop to track information?

• Is it aligned with your strategic or business plan?


Final Exercise Match the form name with the regulatory body:

Form 990 Attorney General’s Office

FTB 199 State of California Tax Board

Audited Financial Statements Office of Management and Budget

RRF – 1 Internal Revenue Service

A – 133 State of California law


Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

City and County of San Francisco:

• Finance Guide for Nonprofits:

www.sfgov.org/site/uploadedfiles/controller/reports/Finance_Guide_110104.pdf

• Controller’s Office Training Series for Nonprofits, including CompassPoint

training materials: www.sfgov.org/site/controller_index.asp?id=32024

Regulatory Agencies:

• Franchise Tax Board: www.ftb.ca.gov

• Internal Revenue Service: www.irs.gov

• Office of Management and Budget: www.omb.gov

• State of California Attorney General’s Office: www.ag.ca.gov/charities

Board Resources:

• Best of the Board Café: A compilation of short articles covering all aspects of

nonprofit Boards. Available at www.compasspoint.org/bookstore.

• Board Café: A free, monthly electronic newsletter for members of nonprofit

Boards of directors, with 44,000 subscribers. “Short enough to read over a cup of

coffee.” Subscribe and see past issues at www.Boardcafe.org.

California Nonprofit Integrity Act:


• California Nonprofit Integrity Act Toolkit: A step-by-step guide with templates for

compliance with the new state law. Available at compasspoint.org/bookstore.


Key words and definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A-133 See OMB A-133 Accounts payable An organization’s unpaid bills. Accounts receivable Income already promised or earned but not yet received by an organization. Can be further specified, for example, grants receivable, contracts receivable, pledges receivable. Accrual basis of accounting The recognition and recording of income when earned, regardless of when the cash is received and expenses are recorded as they are incurred (such as when services are performed or goods are delivered), instead of when they are paid. Activity A core element of the nonprofit organizations, for example, key programs, administration, and fundraising. Activity-based system Is the recording of an organizations finances based primarily on its’ activities rather than its’ funding sources. Activity by funding source report A report that shows how costs for a particular activity are covered by multiple funding sources. Administrative activity The finance, legal, board-related, and general oversight activities of a nonprofit organization. Allocation The process of spreading costs to two or more activities.


Allocation basis The rationale for allocation percentages, for example, number of full-time-equivalents (FTE) per activity or total costs before allocation. Assets The properties or resources the agency owns and uses. Audit The process completed by an auditor that results in an issued opinion on whether year-end financial statements reflect the actual financial activity and condition of the organization for the time period in question. Bottom line allocation The process of allocating common costs proportionately among the activities of the organization. Budget The organization’s plan expressed in dollars (income and expenses). Allows the organization to track actual performance against an approved plan. Capitalization The recording of an item as an asset rather than as an expense when it is purchased. Cash basis of accounting Is the recognition and recording of income only when the cash is actually received and expenses are recognized and recorded only when they are actually paid. Cash flow projection A projection that focuses on the timing of cash receipts and disbursements rather than on its functional classification or level of restriction so that an organization may assess its ability to meet its obligations. Chart of accounts The numerical system for tracking assets, liabilities, net assets, income, and expenses in an accounting system. Drives the reporting capacity of an organization. Common Costs Those costs that benefit more than one activity and that are not easily identifiable with a single activity. (Also called “shared.”)


Conditional Support Revenue such as grants and contributions that are made contingent upon a qualifying event, such as a challenge grant. Current ratio A comparison of the organization’s current assets to its current liabilities; indicates that ability to pay bills and meet financial obligations. Deficit Expenses in excess of related income. Depreciation The process whereby the cost of a capitalized item is broken down systematically among the periods in which the organization will receive benefit from its use. Donated Goods & Services Items and professional services that are donated to an organization Earned Revenue Earned revenue is income that the organization obtains through exchange transactions such as fees, ticket sales, and certain but not all government contracts. Fiscal year The organization’s business year, for example, January through December or July through June. Fixed Assets Assets with a prolonged useful life such as equipment, land and buildings.

Form 990 The Federal tax return required to be filed annually by most nonprofits. FTB 199 The State of California’s Exempt Organization Annual Information Return. Full-time equivalent (FTE) The number of full-time positions at an organization, for example, two full-time staff people and two half-time staff people equals a total of four employees but three FTE.


Functional expense classification The presentation of information about expenses by functional classification (or activity): Program, administration and fundraising. GAAP Generally Accepted Accounting Principles – principles and guidelines developed by FASB (Financial Accounting Standards Board) to provide guidance in the proper recording and reporting of an organizations accounting affairs. General ledger A recording of all transactions of the organization entered into the accounting system usually ordered by the chart of accounts. In-Kind Contributions Items and professional services that are donated to an organization Internal Controls A set of policies and procedures to prevent deliberate or misguided use of funds for unauthorized purposes. Liabilities The debts of the organization, for example accounts payable, unpaid employee salaries and vacation leave, and loans. Line by line allocation The process of allocating common costs by a predetermined rate for each expense line item. Liquid operating reserve Unrestricted money that the organization has accumulated over time beyond what it needs to pay its immediate bills and other commitments. Net Assets The resources ultimately available to the organization. (Assets – Liabilities = Net Assets) OMB A-122 The federal Office of Management and Budget’s circular on cost principles for nonprofit organizations. This pronouncement governs cost allocation for federal contracts.


OMB A-133 The principles for complying with auditing for federal contract awards. The A-133 audit is required of all nonprofits that spend more than $500,000 in federal awards in a year. Overhead rate The percentage calculated by comparing total overhead expenses (administration plus fundraising) to total expenses. Permanently Restricted Support Grants and contributions whose principal is to be invested according to the donor’s wishes. Program Services The activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfills the purposes or mission for which the organization exists. RRF-1 The annual form required by the State’s Charitable Registry Trust which must be submitted to the Attorney General’s Office. Source-based system Is the recording of an organization’s finances based on its funding source reporting requirements rather than its activities. Statement of activities Also known as the income statement or profit and loss statement in the for-profit world, this statement reports the financial activity of the organization over a period of time by function. Statement of financial position Also known as the balance sheet in the for-profit world, this statement summarizes the assets, liabilities, and net assets of the organization as of a specific date. Supporting Services All activities of a not-for-profit organization other than program services (management, fundraising and membership development).


Temporarily Restricted Support Grants and contributions that are to be spent for a specific purpose or during a restricted period of time. Unconditional Support Revenues that are given without reference to any contingency or qualifying event. Unrestricted Support Grants and contributions given by the donor without reference to a specific purpose or use within a specific time period. Variance Difference between planned and actual financial performance.


Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bylaw Language on the Audit Committee This template provides sample language to be added to your bylaws in the article that defines

committees of the Board of Directors. Once you have the text, you’ll want to actually amend your

bylaws by having the board pass a resolution.

Bylaw language:

Section XX. Audit Committee. For any tax year in which this corporation has gross revenues

less governmental revenue for which an accounting is already required, of $2 million or more,

this corporation shall have an Audit Committee whose members shall be appointed by the Board

of Directors, and who may include both directors and nondirectors, subject to the following

limitations: (a) a majority of the members of the Audit Committee may not consist of members

of the Finance Committee, if any; (b) the chair of the Audit Committee may not be a member of

the Finance Committee, if any; (c) the Audit Committee may not include any member of the

staff, or the President or Treasurer; (d) the Audit Committee may not include any person who has

a material financial interest in any entity doing business with this corporation; and (e) Audit

Committee members who are not directors may not receive compensation greater than the

compensation paid to directors for their board service.

Subject to the supervision of the Board of Directors, the Audit Committee shall: (1) recommend

to the Board of Directors the retention and, when appropriate, the termination of an independent

certified public accountant to serve as auditor; (2) negotiate the compensation of the auditor on

behalf of the board; (3) confer with the auditor to satisfy the Audit Committee members that the

financial affairs of this corporation are in order; (4) review and determine whether to accept the

audit; and (5) approve performance of any non-audit services provided to this corporation by the

auditor’s firm.

Source: The California Nonprofit Integrity Act Toolkit; CompassPoint Nonprofit Services


Document Retention Policy A Document Retention Policy will help make sure that you keep files as required by law and destroy them in a systematic manner. A sample Document Retention Policy for your organization might look like this:

Document Retention Policy

Accounts payable ledgers and schedules 10 years Accounts receivable ledgers and schedules 10 years Audit reports of accountants Permanently Bank statements 3 years Capital stock and bond records: ledgers, transfer payments, stubs showing issues, record of interest coupon, options, etc.

Permanently

Cash books Permanently Checks (canceled, with exception below) 10 years Checks (canceled, for important payments, i.e., taxes, purchase of property, special contracts, etc. [checks should be filed with the papers pertaining to the underlying transaction])

Permanently

Contracts and leases (expired) 10 years Contracts and leases still in effect Permanently Correspondence, general 2 years Correspondence (legal and important matters) Permanently Depreciation schedules Permanently Duplicate deposit slips 3 years Employee personnel records (after termination) 7 years Employment applications 3 years Expense analyses and expense distribution schedules (includes allowance and reimbursement of employees, officers, etc., for travel and other expenses

10 years

Financial statements (end-of-year) Permanently General ledgers and end-of-year statements Permanently Insurance policies (expired) 3 years Insurance records, current accident reports, claims, policies, etc. Permanently Internal reports, miscellaneous 3 years Inventories of products, materials, supplies 10 years


Invoices to customers 10 years Invoices from vendors 10 years

Journals Permanently Minute books of Board of Directors, including bylaws and Articles of Incorporation

Permanently

Payroll records and summaries, including payments to pensioners 10 years Purchase orders 3 years Sales records 10 years Scrap and salvage records 10 years

Subsidiary ledgers 10 years Tax returns and worksheets, revenue agents’ reports, and other documents relating to determination of tax liability

Permanently

Time sheets and cards 10 years Voucher register and schedules 10 years


SIX THINGS THE BOARD PRESIDENT SHOULD CHECK BEFORE THE 990 IS FILED Federal Form 990 is the ONLY information nonprofits are required to disclose to the public, and any member of the public can request a copy, so you want to make sure that what

it says is not only accurate, but reflects what you want to communicate to the public. Form 990, required by the IRS for all nonprofit organizations except those with annual revenues of less than $25,000 and religious organizations, is frequently requested by donors and grantmakers, and increasingly available on the web. But many boards don't pay much attention to what's on their 990s, and you and other board members could have a bad surprise if you haven't made sure you feel comfortable with the "story" the 990 tells about your organization. Your organization's 990 is due on May 15 if your fiscal year ended on December 31 (990s are due on November 15 for organizations with fiscal years ending June 30--in other words, 4 and 1/2 months after the close of the fiscal year). 990s are often prepared by the organization's CPA auditor, but can be prepared by the staff or board as well. Take 15 minutes to review the 990 for the following common problems:

1. Statement of Functional Expenses (Part II): In this section the organization must classify all expenses as one of three types: Program Services, Management & General, or Fundraising. We know one organization that put almost all expenses into "Management & General" because their work was done by management-level staff; in fact, such work was more appropriately classified as "Program Services." If the percentages for either Fundraising or Management & General appear too high, go back and make sure that your organization used appropriate guidelines when classifying expenses.

2. Addresses of board members: Part V of the 990 asks for a "list of names and addresses of officers, directors, trustees, and key employees." It is NOT necessary to list home addresses, and many board members and staff members feel that doing so encourages invasion of privacy. It IS appropriate to use the organization's business address in this section for all board and staff members.

3. Let your work show your mission. In Part III, "Statement of Program Service Accomplishments," the 990 asks for a statement of the organization's purpose and a list of program activities (examples: public awareness campaign, medical research work, home meal delivery, youth training, forest trail construction). Take the time to be sure that what you say here is what you would say to the press or the public or the IRS . . . after all, that IS the audience for the 990.

4. Check the math. (Especially if you're an education organization!) In one study of 990s, 67% had significant arithmetic errors.


5. Remind staff and other board members that Section 1D of Schedule B need NOT be disclosed to the public. Schedule B (an attachment to the 990) lists the names of major donors and the amounts given. If someone asks for your organization's 990 and Schedule B, you are required by law to give it to them, but you do NOT need to give them Section 1D of Schedule B that has this information.

6. Make sure it's filed on time. Failure to file on time results in rapidly accruing penalties, and board members could be held individually liable for those penalties (even if you have Directors & Officers liability insurance). The board president should check to be sure it is filed on or before the due date (again, 4 and 1/2 months after the close of the fiscal year).

Thanks to Bill Levis of Baruch College, Jude Kaye of CompassPoint Nonprofit Services, Peter Swords of the Coordinating Committee of New York, and Pat Read of Colorado Association of Nonprofit Organizations for contributing to this article.

You are reading the BOARD CAFÉ, published by CompassPoint Nonprofit Services, in partnership with the Volunteer Consulting Group (of New York). The BOARD CAFÉ is one component of Board Match Plus+, CompassPoint's collaborative venture with the Volunteer Center of San Francisco to strengthen the ability of individuals to serve on nonprofit boards



Ten Quick Ways to Improve Board Meetings 08-31-2004 Are you feeling a little lazy—as we are—as this summer cto an end? There are some tasks, such as mending a button odoing one thing to improve board meetings, that are the sort of thing that take "a year and fifteen minutes to do." This issue o

the issue’s question, and then goes on to give you Ten Quick Ways to Invigorate Board Meetings. Have a great fall. – Jan Masaoka FAVORITE WEBSITES FOR BOARD MEMBERS In the dozens of answers from Board Café readers, the most interesting fact is that hardly any websites were mentioned more than once. Many board members appreciate sites that are about their field—such as disabilities

omes r

f

(http://www.ilru.org) or private schools (http://www.caisca.org) - which reminds me that as board members, we often don’t know the field our organizations work in - and a quick place for independent information is a great thing to ask for from our executive directors. Three sites from readers especially worth a look: http://www.irs.gov/charities () -- the official IRS site that includes rules and guides (such as “A Charity Guide to Car Donations”) and forms to download and fill out (such as Form 990 due every year for most nonprofits) (http://www.guidestar.org) – where Forms 990 are published along with other information about nonprofits—learn about the budgets, activities and salaries of nonprofits in your area to see how you compare http://www.boardsource.org () – the site for BoardSource, a publisher and FAQ center about nonprofit boards P.S. Thanks to the readers who also noted that they found out about their favorite sites from previous issues of the Board Café!

TEN QUICK WAYS TO IMPROVE BOARD MEETINGS When we think about the boards we’re on, we usually think about the board meetings—which says a lot about the importance of having good meetings. Make a new year’s resolution to implement one of the following ideas each month:

1. Name tags for everyone, every meeting. It’s embarrassing to have seen people at several meetings and wondered what their names are . . . and later it’s REALLY hard to admit you don’t know their names.

2. Post an acronym chart. Make a poster of frequently used external and internal acronyms (such as CDBG for Community Development Block Grants or DV for domestic violence) and post it on the wall of every meeting. (If you distribute the list on paper it is soon lost.)

3. Write an “anticipated action” for each agenda item. Examples: “Finance Committee report, brief questions and answers: no action needed.” “Volunteer recruitment and philosophy: Anticipated Action = form committee of 3-4 board members.” “Public Policy Committee: Anticipated Action = approve organizational statement to city council on zone changes.”

4. Make sure that each person says at least one thing at every board meeting. This is the Chair’s responsibility, but everyone should help! “Cecilia, you haven’t spoken on this

http://www.ilru.org/

http://www.ilru.org/

http://www.irs.gov/charities

http://www.guidestar.org/

http://www.boardsource.org/

issue. I’m wondering what you’re thinking about it?” “Matt, at the last meeting you made a good point about finances. Are there financial issues here that we aren’t thinking about?”

5. No one-way communication from staff. If you have a regular Executive Director’s Report on the agenda, or if a staff program director is giving you a briefing, be sure that such presentations need a response from the board. If not, put them in writing in the board packet and just ask if there are any questions.

6. Don’t include committee reports on the agenda just to make the committees feel worthwhile. If a committee has done work but doesn’t need it discussed, put the committee report in the board packet. (In the meeting be sure to recognize the committee’s good work and refer people to the written report.) Instead, schedule committee reports in the context of the main discussion. For example, if there is a discussion planned on attracting and retaining staff, reports from the Finance Committee and the Personnel Committee may be appropriate.

7. Note to the board president and the executive director: what are the two most important matters facing the organization—economic downturn, changes in government funding, decreased preschool enrollment due to higher unemployment, a competitor organization, demographic changes in the county? Is one of these matters on every board agenda?

8. Encourage “dumb” questions, respectful dissent, authentic disagreements. Find a chance to be encouraging, at every meeting: “Sylvia, I’m glad you asked that ‘dumb’ question. I didn’t know the answer either.” “Duane, I appreciate the fact that you disagreed with me in that last discussion. Even though you didn’t convince me, your comment helped make the discussion much more valuable.”

9. Make sure the room is comfortable! Not too hot or cold or crowded. Offer beverages and something light to eat such as cookies or fruit.

10. Adjourn on time, or agree to stay later. Twenty minutes before the scheduled end of the meeting, the Chair should ask whether the group wants to stay later: “If we continue this very interesting discussion, we will have to stay fifteen extra minutes to hear the recommendation on the executive director’s salary. Can everyone stay that long, or should we end this discussion and move to that one immediately?”

BONUS IDEA: Once every year or two, survey the board about meetings. Pass out a questionnaire for anonymous return to the board vice president or secretary, asking, “What do you like best about board meetings? Least?” “Are you satisfied with the items that are usually on the agenda?” “How could the board president do more to encourage discussion at the meetings?” “Is the location or time of day difficult for you?”


Documents

The Board’s Role in Financial Governance · Members of the board of directors are required by law to play a governance role (as described above) but they are also expected to play