The Role of the Board in Nonprofit Financial Oversight

Your board takes on many tasks to ensure your organization runs smoothly. One of their top responsibilities is assisting with financial management. Without proper financial oversight and practices, your organization won’t have the necessary resources to fulfill its mission.

Help your board execute its essential role in overseeing your nonprofit’s finances and keeping your organization afloat. Let’s explore board members’ financial oversight responsibilities—including developing financial policies, approving your annual budget, monitoring financial performance, and assisting with your strategic plan—and how you can support them.

Developing Financial Policies

Board members are responsible for developing financial policies, procedures, and controls guiding fund use. These guidelines typically cover budgeting, financial reporting, cash management, investing, and fundraising.

Specific Financial Policy Tasks

• Creating new policies. When your nonprofit is first starting out, the board is responsible for developing its initial financial policies. These should include gift acceptance, conflict of interest, expense reimbursement, and fiscal policies and procedures.

• Updating current policies. Board members should regularly review these policies and update them as needed. For example, if your nonprofit starts accepting cryptocurrency donations, you should add relevant guidelines to your gift acceptance policy.

• Ensuring compliance. Board members will also work closely with the finance committee to ensure all policies comply with legal, regulatory, and accounting standards and regulations. For example, since the IRS requires donors to obtain a written acknowledgment for contributions of $250 or more to ensure tax deductibility, your gift acceptance policy should outline your process for issuing these acknowledgments.

How Nonprofit Leadership Can Assist

• Drafting policy recommendations. Since nonprofit leadership is responsible for managing financial risks, they can help board members by overseeing financial policy creation, giving recommendations based on their knowledge of the nonprofit’s priorities, and monitoring these procedures.

• Providing legal and financial guidance. To ensure all policies comply with relevant regulations, leadership can work with nonprofit accountants, legal advisors, and consultants to review the proposed policies and lend their expertise.

• Facilitating board discussions. Nonprofit leaders may provide context to the board’s policy creation efforts and attend board discussions to ensure policies align with the organization’s overarching mission and goals.

Approving Your Annual Budget

The nonprofit budgeting process involves several different stakeholders, including your board. To streamline this process, your leadership team must build a strong relationship with the board and work closely with them to develop a realistic budget.

Specific Budgeting Tasks

• Reviewing and approving the budget. Board members have the final say on your organization’s budget. They’ll use their knowledge of your nonprofit’s priorities to ensure the proposed budget meets your organization’s current needs.

• Assessing financial risks. While leadership oversees risk management, board members may evaluate proposed risks and ensure your budget addresses them. For example, if a recession is imminent and donors may not be able to contribute as much as they typically would, the board may suggest increasing the reserve fund allocation.

• Evaluating long-term financial sustainability. In addition to ensuring the budget covers current needs and risks, the board will also check that the budget sets your nonprofit up for long-term success and prosperity. For instance, they may suggest investing more heavily in hiring new team members to increase your organization’s capacity.

How Nonprofit Leadership Can Assist

• Preparing and presenting the budget. Ultimately, your leadership team—including your executive director or CEO and senior management staff—should oversee the budgeting process. They’ll work with the board to develop a budget that best serves your mission.

• Providing data and insights. In addition to the budget itself, leadership may provide financial data that supports their resource allocation recommendations and provides more context for the board’s budgeting decisions.

• Offering scenario analysis. Leadership may create different versions of your budget based on your nonprofit’s best-case, worst-case, and most likely scenarios to stay prepared for any situation. They may turn to a nonprofit accountant or fractional CFO for help with this task.

Monitoring Financial Performance

Once your board has finalized the budget, they’ll monitor your organization’s financial performance, ensuring your nonprofit stays on track and financially stable.

Specific Monitoring Tasks

• Reviewing regular financial reports. Board members should review relevant financial reports monthly or quarterly and at year-end. YPTC’s nonprofit financial statements guide explains that a full set of reports includes a Statement of Financial Position, a Statement of Activities, a Statement of Cash Flows, and a Statement of Functional Expenses.

• Assessing performance against budget. Your board should also monitor your income and expenses and compare them to your budget. They should investigate any discrepancies and determine how to resolve them moving forward.

• Evaluating financial health. To assess your organization’s financial health, the board should use key performance indicators (KPIs) like donor retention rate, program services ratio, months of cash on hand, and fundraising efficiency ratios.

How Nonprofit Leadership Can Assist

• Providing timely financial reports. The leadership team will either create financial reports themselves or outsource the work to an accounting firm. Once complete, they’ll provide the reports for the board to review and analyze.

• Highlighting key financial metrics. Leadership can pinpoint specific KPIs and outcomes they want the board to focus on. For example, if your nonprofit’s donor retention has fluctuated recently, leadership may prompt the board to prioritize calculating and monitoring donor retention rate.

• Analyzing budget variances. Your leadership team should work with the board to explain any discrepancies in performance against the budget and recommend adjustments to get your nonprofit back on track.

Assisting with Your Strategic Plan

Since your board has an in-depth understanding of your organization’s top priorities, they can act as a strategic planning resource to guide your nonprofit in the right direction and ensure financial sustainability.

Specific Strategic Planning Tasks

• Providing financial input. Board members should review your nonprofit’s strategic plan to ensure it’s financially feasible. They may suggest adjustments based on your organization’s financial capacity and account for potential financial risks.

• Supporting resource allocation. The board can guide your team on allocating resources to certain initiatives and programs. They’ll use their knowledge of your nonprofit’s priorities to make strategic financial decisions that maximize your organization’s impact.

• Ensuring alignment between financial and strategic goals. Board members should also review your strategic plan through the lens of financial sustainability. All outlined priorities and initiatives should contribute to your overarching strategy and mission. For example, your board should ensure your goals align with the SMART goals framework (specific, measurable, achievable, relevant, and time-bound) to increase your chances of success.

How Nonprofit Leadership Can Assist

• Providing insight into financial resources. To help board members assess your organization’s financial capacity, leadership may present relevant data points to guide their decision-making. For instance, they may provide details on an incoming sponsor, including how long the partnership will last and how much money they will contribute.

• Developing financial forecasts. Working closely with your board, leadership can forecast future financial performance to steer your strategic plan in the right direction. That way, board members can be confident your strategic plan is focused and sustainable.

Role of the Finance Committee

Board members with financial expertise may elect to join your nonprofit’s finance committee. Finance committee members have additional responsibilities regarding financial oversight, including:

• Reviewing financial plans and reports. The finance committee will look at your budget with a closer eye to ensure it’s reasonable. They will also dive deeper into your financial reports and performance metrics to verify compliance with Generally Accepted Accounting Principles (GAAP) and keep your nonprofit financially healthy and sustainable.

• Recommending financial policies and procedures. As mentioned before, finance committee members contribute to the policy development process. They may recommend policies your nonprofit needs to implement and ensure these policies align with legal, regulatory, and accounting regulations.

• Managing assets and investments. Major assets like endowment funds and reserves require financial expertise to manage appropriately. The finance committee will monitor these assets, develop investment policies that help them grow, and review investment performance.
• Overseeing the audit process. The finance committee ensures your nonprofit undergoes reliable audits by selecting external auditors, reviewing audit findings, and creating a plan to implement relevant audit recommendations.

Due to their financial expertise, the finance committee members provide more extensive financial oversight than the general board and focus their efforts on helping your nonprofit remain accountable and transparent.

Board members’ guidance is crucial to keeping your organization focused on mission pursuit. By providing financial oversight, board members ensure you use funds responsibly and in accordance with your nonprofit’s purpose.

Consider having board members undergo regular financial literacy training to stay up to date on the latest industry trends and best practices. Incorporate relevant finance-focused sessions during board member orientation, and provide new board members with financial mentors (such as more experienced board members with financial expertise) to guide them and answer any questions.

Depending on your board’s level of financial expertise and available time, it might be worth outsourcing certain financial management functions to a nonprofit accountant or fractional CFO. For best results, look for a provider who has experience working with similar nonprofits and assisting boards in their financial duties.