Today’s nonprofit organizations have many legal and ethical requirements, including electing and maintaining a board of directors. According to the National Council of Nonprofits, the board’s responsibility is to “steer the organization towards a sustainable future by adopting sound, ethical, and legal governance and financial management policies.”
While a nonprofit’s board of directors has many roles, one of its most vital is financial oversight. However, the term “financial oversight” isn’t always clear, often leaving the organization, its founders, and its board members confused. Here are some imperative best practices that boards should perform to ensure effective financial oversight.
Overseeing Nonprofit Bookkeeping: Best Practices for Boards
The board of directors of a nonprofit organization has many financial responsibilities, including:
Budget Review and Approval
The board reviews and approves the nonprofit’s budget and reviews actual revenues and expenses against the budget at least twice annually.
Internal Controls
The board ensures that the nonprofit entity has adopted and adheres to internal controls and that there is no misuse of assets.
Financial Statement Interpretation
The board understands how to read and interpret financial statements and reviews annual tax returns before filing them.
Financial Reserve Policy
The board creates a financial reserve policy that sets aside enough funds to cover a certain number of months’ operating expenses.
Financial Indicators
The board sets financial indicators while still remaining vigilant about environmental factors that could impact the organization’s financial performance.
Accounting Functions and Independent Auditor
The board is also responsible for overseeing the charitable nonprofit’s accounting functions and the performance of the independent auditor if one is hired.
Each Board Member Has a Fiduciary Responsibility
Financial oversight isn’t just the responsibility of the Board Treasurer or the finance committee. No matter which committee a board member belongs to, each one has a fiduciary responsibility to the nonprofit organization. A lack of financial exposure won’t relieve someone of their obligation to oversee the financial performance of the nonprofit. Instead, it’s your responsibility to educate yourself on the basics of financial management and oversight.
When it comes to nonprofits, every board member should be able to:
- Review the entity’s annual tax return before it is filed
- Evaluate the annual audit
- Examine periodic financial statements at each board meeting
What Should Excellent Financial Oversight Look Like?
Excellent financial oversight of a nonprofit entity should mirror this closely:
- Each board member has a general understanding of the entity’s financial sources and uses of funds. They also understand the nonprofit entity’s overall financial position and sustainability.
- Every board member is familiar with the crucial compliance issues the organization faces, as well as the policies in place that ensure adherence to compliance standards.
When you have beneficial conversations about the nonprofit entity’s financial performance with all board members participating in board meetings, you likely have effective financial oversight.
These conversations should involve a transparent review of financial statements, budgets, audit findings, and key performance indicators to ensure accountability and alignment with the organization’s mission.
Encouraging diverse perspectives and open dialogue among board members fosters a collaborative environment for addressing fiscal challenges and making data-driven decisions that prioritize long-term sustainability.
Ultimately, proactive financial oversight through inclusive board engagement can strengthen the nonprofit’s credibility, donor confidence, and ability to drive positive impact within the communities it serves.
Your nonprofit’s board of directors should always have its hand on the financial pulse of the organization. By adhering to the imperative practices involved in financial oversight, your board can ensure it is upholding its fiduciary responsibilities.
Mighty Nonprofits provides reliable, high-quality bookkeeping services that are customizable for nonprofit organizations. They purposely keep their operations small to give each client the personalized attention they deserve.