The Board Financial Report

It is the board of directors that has highest level of responsibility and accountability when it comes to managing the money their organization receives and uses. What does the exercise of their financial duty usually look like? More importantly, what could it look like?

It is common for the board financial report to be a spreadsheet detailing monthly revenues and expenditures compared to the budget. This sometimes causes board members’ eyes to glaze over, or for a particular director to latch onto a particular line item and take the group down a rabbit hole.

Surely the board financial report, or reports, can be more effective and meaningful to all involved. In this post I offer some suggestions. I think less frequent and time-consuming reporting could be perfectly fine for some organizations. Find out if you are one.

Looking at the key aspects of board financial reporting makes for a somewhat long piece. My endnotes point the reader to additional resources on various aspects of the topic. Here they are:

1. Accounting lingo
2. Foundations: financial management policies and budgeting
3. The main players – treasurer, executive director and bookkeeper
4. The three key reports
5. Financial red flags
6. The change conversation(s)
7. Financial reporting-how often?
8. Letting go
9. (My financial reporting needs assessment)

Clearly the monitoring the financial health of one’s non-profit is the main purpose of the regular financial report to the board. The “numbers” are powerful especially in a governing environment where most other indicators of organizational performance are harder to gauge. 

Even though the board seldom does the hands-on work of keeping track of the financial side of things, the “buck”, to use a familiar phrase, stops with them. Most directors, volunteers all, do not regularly grapple with “accounting” practices in their work or family lives. This does not mean they cannot understand the financial side of the organization they care about. This post will help.

Some unpacking of accounting terminology seems like a good place to start. 

1. Accounting lingo

Words and concepts in financial management add to the mystery on this topic, certainly for most board members. So here is a bit of a primer.

• Bookkeeping is the term to use when talking about the day-to-day needs of a non-profit to keep track and record the sources and amounts of income it receives and uses, and to allocate or classify the amounts involved to specific categories or programs.  Usually this involves a bank account statement, a cheque book, and computerized financial record keeping system. For those interested, more on the basic tasks of non-profit bookkeeping can be found online.¹
• Accounting has to do with the interpretation and presentation of financial data (from the records maintained through bookkeeping) and the decision making associated with this information.²
• Management reporting is all about the construction of the financial information that is put in front of key decision-makers including of course, the board, the focus here.
• External reporting has to do with providing information to funders, members and stakeholders. This is about organizational accountability. The annual auditor’s report, if one has one, falls under this heading. Typically, one’s “Annual General Meeting” is also about this.
• Internal controls have to do with the safeguards an organization put in place against fraud, theft and errors. These focus mostly on the organizational structure, the segregation of duties. It is all about having more than one set of eyes on the recording of financial transactions. 

In an earlier post on I defined the terms “responsibility“ and “accountability”. They are relevant here. 

• Responsibility has to do with the work a person or group has taken on or agreed to handle. They are tasks. Often, they go with a particular organizational position. 
• Accountability refers to who is answerable, that is, who assumes ownership for actions or tasks taken or not taken. It answers the question of who must give “an account of” or justify, what has occurred. An executive director may not be wholly responsible for the financial management 

Accountability tends to look backwards, responsibility forward.  Some would say that responsibility can be shared, accountability cannot. When it comes to the board’s accountability to the members or to the community, it is a single actor not a group of individual actors.  

2. Financial reporting foundations

The worry about the exercise of the board’s financial responsibility can be reduced by having some good foundational practices in place. There are two key ones: a financial management policy or set of policies, and a solid budgeting process.

Financial management policies

I have written much on non-profit policies and created many examples, including ones on financial management. My October 2020 post De-cloaking Policies should be helpful. Operational policies of which human resource and financial practices are the most important, constitute written instructions to the executive director on what standards are expected. 

A written financial management policy, at a high level, is a statement of the organization’s commitment to good accounting and bookkeeping practices. Pages and pages describing the details are not needed. Two or three pages should be plenty. They also describe who exercises authority over what financial matters, the board or the executive director?  

A financial management policy or set of policies, should speak to each of the following matters. Indeed, these could be the subheadings:

• Accounting and bookkeeping standards
• Internal controls
• Banking, loans, investments
• Reserve funds 
• Revenues (sources and types)³
• Expenses (kinds and program allocation)
• Purchasing
• Protection of assets (e.g. insurance) 
• External compliance (e.g. funder requirements, payroll deductions, charity submissions)
• The budget and budgeting process
• Reporting to the board

Many non-profits will have some of areas covered already, perhaps in a combination of policies, job descriptions and employment contracts. There may be benefit though in pulling them together even if it means there is duplication.

The last piece on this list addresses what financial reports are expected. One’s policy should specify what information the board should get, how often and, what circumstances outside the norm, need to be reported. Read on.

Of all of the above, “internal controls” is the item that often concerns boards, although few would use this term. The worry of course, is about the misuse of money, theft perhaps, but tracking errors too. Looking at a table of numbers at a board meeting is unlikely to result in the “discovery” of a problem. Instead, boards must ensure that there are internal controls in place as preventive measures. These are structural items more than accounting ones and can be specified under this heading in one’s financial management policy. My endnotes on this provide much useful guidance.⁴ 

Under some of these policy subheadings there should be clarity on what decisions the board, rather that the executive director, is empowered to make. These this can include securing a loan, increasing the line of credit, the size and use of a reserve fund or a proposed staff-wide wage increase. Because commitment to a budget is what really constrains the executive director’s financial authority, such a list should be short.

The budget

Most non-profits operate with a budget. The budget is the non-profit’s financial plan for the year, an expression of the work it will do in pursuit of its mission. Performance to budget is an essential financial monitoring tool for both the board and staff.

Ideally a budget should strive to allocate the money involved, both revenues and expenditures, to discrete program areas.⁵ A mere list of expense categories, like rent, wages and internet, is not very useful except perhaps in the smallest of non-profits.

The executive director is usually the one most responsible for consulting with staff, putting together the budget and bringing it to the board for approval.⁶ However there are circumstances where there may need to be some board involvement in budget preparation, the treasurer certainly.

The board’s approval of the budget should involve some discussion beyond the numbers proposed. It is important for directors to be curious about what assumptions lie behind some of revenue and expense figures. Financially, predictions should seek to be conservative.

Another aspect of budgeting is the fact that revenues, and maybe some expenditures, do not occur evenly monthly or quarterly. Variations occur throughout the fiscal year. The pattern of transactions should be understood by the board and ED. A spreadsheet destined for the board’s eyes need not be broken down into this level of detail, but such information should be part of the budget notes. 

3. The treasurer, executive director and bookkeeper

The treasurer is one of the three or four board officers required by most incorporation bylaws. The level of treasurer involvement in financial management varies from nominal to fully hands on. Somewhere in between is probably best. ⁷

Ideally the treasurer’s role should be that of overseeing, at a high level, the financial practices of their non-profit and ensuring that other directors adequately understand the financial side of their organization’s’ governance.  A treasurer ought to champion the creation of clear financial policies and budget processes. One does not need to be an accountant to do this. A financially literate treasurer many also function as a mentor to the executive director, especially a new one. 

The involvement of the board treasurer in the preparation of the budget varies greatly. Often their role may be limited to formally presenting it to the board and moving its acceptance. 

If the organization has an executive director (or CEO) this is the person who shoulders the day-to-day and month-to-month financial management responsibility even if they may not the one doing the bookkeeping. They are also the one accountable to the board for reporting accurately on the organization’s financial situation and for alerting the board to any emerging situations. 

One’s executive director likely will be the main author of one’s financial management policy although may require some help in drafting it. And, as already suggested, they are the primary constructor of the annual budget.  

In many small non-profits the executive director is the one who handles all the financial record keeping. Where this is the case a more active and knowledgeable treasurer, one who meets with the ED outside of board meetings, is recommended.

Having a bookkeeper allows a non-profit to have separate people involved in the organizations’ financial record keeping, an important internal control mechanism.

It is not uncommon to assign the day-to-day bookkeeping to an administrative staff person who reports to the executive director. Some training and an orientation to a particular piece of bookkeeping software may be required.  

Alternatively, and this is increasingly common in small non-profits, one can engage an external firm to handle one’s bookkeeping and payroll services. There are lots of local small businesses who provide this service. 

Freeing up staff time, for the executive director particularly, for more mission related work can be valuable, despite the cost of a contracted service.⁸

4. The financial reports

With policies in place, an annual budget and clarity in financial responsibilities, what are the main reports that a board may need? There are three key ones.

The first financial report is the one outlining revenue and expenditures compared to the budget. The numbers presented ought always to be for the year-to-date. This report is a statement of operations, for a period of time, looking backwards, expressed in financial terms. Without the budget numbers present this report is of little value. 

This is the report every board should regularly receive. How often though, is another matter.

The second report concerns the financial position of the non-profit. It is the balance sheet, a statement of the assets and liabilities of the organization at a point in time.⁹

The balance sheet is about changes in a non-profit’s level of assets or liabilities. Its construction can reveal situations that the board and ED should be alert to. Here are the main ones:

• The organization has a lot more cash, or a lot less cash, on hand than is usual (asset) 
• Funders or donors owe much more than is usually the case at this point in the year (asset-receivables). 
• The organization has had to draw on its line of credit more than has typically been the case (liability-debt) 
• The organization owes more than to others than usual. (liability-payables). 

One of the bigger items for many non-profits will be “unearned revenue“, that is, money received for services yet to be provided. This is frequently a factor for non-profits where funders provide money upfront. A large amount of cash in the bank due to unearned revenue is not money one is free to use for other purposes. The question here for boards and EDs is: “Has our level of unearned revenue (both an asset and a liability) changed dramatically?”

Where an organization’s finances are stable and predictable, a balance sheet statement is not a required part of every financial report. A quarterly balance sheet report, one that compares the numbers with ones from the previous period, is probably adequate. A review of the balance sheet numbers by the executive director and treasurer might be done more often. This too is an “instruction” item for one’s policy. 

A cash flow report is simply a statement of when monies come into the organization and when they go out. It is about timing. The question they address: is there enough money in the bank to operate without drawing more than usual on the line of credit?¹⁰

Cash flow statements are needed when revenues (grants, donations, contracts) to be received are uncertain and unpredictable. Expenses tend to be predictable and regular.

So, does a board require a monthly cash flow statement? The answer is no, but again the financial management policy should be clear about the executive director’s duty to report an anticipated cash flow problem. The discussion of cash flow around the board table might start with a “what if scenario” regarding the risks associated with a particular funder.

5. Financial red flags

You will be glad to know that there are some financial red flags, problems to be on the alert for, that boards and executive directors can understand.¹¹ Some repetition from above seems justified under this heading. Here they are:

• Unexpected revenue or expense variations compared to the budget
• Cash flow challenges
• Extraordinary changes in assets and liabilities
• Inadequate staff training
• Unexpected staff turnovers
• Uncertainty on the financial horizon

The first is the easiest and most important, and has been described already; “how are we doing relative to our annual budget”? Are there any unexpected variances (differences), positive or negative, compared what we predicted when we approved the budget? Month to month variances are common of course and are often not an indicator of a problem. Occasionally they might even signal an opportunity. The question is “are any surprises we need to look at?” 

The second indicator, also described earlier, asks the question: “will we have enough money coming in to cover payroll and other expenses as far as we can see”.¹²

The third indicator has to do with sudden or unexpected changes in assets and liabilities. I dealt with this in the section discussing the balance sheet report. 

The fourth and fifth red flags have to do with the need for training or mentoring, or the departure of a staff person that affects the organization’s ability to manage its finances. Non-profits struggle with matters of organizational capacity on an administrative front not just in program delivery. Executive directors should not hide this challenge from their board even if they are not looking to the board to solve the problem.

The departure of one’s executive director, and the introduction of a new one, is also likely a financial reporting concern. The question is “does this change create some uncertainty in maintaining our bookkeeping and accounting practices”?  If the answer is yes, or even maybe, it may suggest the need for more financial reporting to the board in the short term. Here is where one’s treasurer needs to speak up.

The sixth red flag has little to do with the facts and figures. There is always uncertainty on the horizon for non-profits. New technology, changing values and new public policy directions are part of organizational life. The question “what is on the financial horizon for our non-profit” does not require a clear answer but is still an important yearly board room conversation. Inviting some other voices to join the board in such a discussion may be of value. My post from 2017, Guests in the Boardroom, offers a little insight here. 

I have created a one-page Financial Red Flag Report Checklist based on the above. It is a simple tool, a touchstone report if you like. One merit is that it does not require the board to try make sense of the numbers. Indeed, the information could be presented without a single figure. You might consider adopting it as a piece of your regular board financial report alongside your revenue and expense spreadsheet. This checklist is free and is adaptable. Email me (contact form) and I will send it to you.

6. The change conversations

Now to the matter of changing how you do your financial reporting. I am convinced that non-profit governing groups can move to a more appropriate and meaningful board financial reporting practice, strengthen their financial oversight, spend less time on routine financial items and more time on critical ones.  

Are you game? Here is what is involved:

• Create or modify, and then approve, a financial management policy (or set of policies). This is the big item, time wise for the executive director and possibly the treasurer.¹³
• Review your non-profit’s budgeting process, possibly improving the process and presentation
• Assess your financial reporting needs using my “Financial Reporting Needs Assessment” at the end of the post. 
• Have a “red flags” conversation around the board table. Perhaps present the board with your own version of a red flags checklist. This is an important educational piece for the board and the executive director. Maybe you will want to adopt it.

Then, based on your financial reporting needs assessment, the board and executive director should determine what specific board financial reports you feel you would like on regular basis. Your choices are (1) revenue and expenses compared to budget, (2) balance sheet report, (3) cash flow statement and my suggestion, (4) a red flags checklist. 

After agreeing on what financial reports one really needs, the next question is “how often”?

7. How often should you report?

It is important to recognize that a board’s meeting schedule and the agenda routine is itself financial report frequency driver. For many non-profits, not all of course, not much really changes from month to month in terms of the financial health of their organization.

Consider that the following options could be open those organizations whose boards meet monthly:

1. A report that is on the agenda every second month. Provide your board with a report or report materials every month but half the time only as background information (FYI). In other words send the report with the board meeting “package” but take the item off the agenda.
2. Move to a quarterly “Financial Report” on your board meeting agenda and focus the discussion differently each time. 

Clearly board members should be able to raise financial questions at any board meeting whether or not finances are on the agenda. However, where a non-profit is not in precarious situation, a board financial report less often than monthly is all that is needed. This makes space on the board agenda for other important matters. Remember, I am referring here to routine financial reports, not the timely reporting of special situations.  

I can hear many arguing to keep the financial report on the agenda. “It does not take much meeting time so why not keep it; it is an important routine?” Do you really want to continue dividing the board’s attention into 10 or 12 parts every time they meet? Few would. Others might argue that monthly report must be “approved”. Why is this so if the board has already approved the budget and everything is “hunky dory”? It does not. And then there is the argument that the minutes need to show the board’s attention to oversight? So, is 5 minutes of oversight every meeting better than 15-30 minutes of more substantial financial work four times a year? Surely not, and anyway the minutes can easily list the materials sent to the board.

If board -executive director teams are prepared to experiment with fewer routine “financial reports” on the board agenda, and they meet monthly, they might even consider the following quarterly reporting and discussion model.

1. One meeting focused on reviewing and approving the budget for the upcoming year
2. One meeting focused on financial matters that might include creating, building and using reserve funds, investments in technology, wages, benefits and staff retention, future space requirements and building maintenance.
3. A meeting to look at revenues including fundraising, grant trends and diversification of funding.
4. A meeting devoted to year-end figures, auditor’s recommendations, and possible improvements to financial practices and policies.

Each meeting involves a look at the financial reports the board has asked for and then moves to a more focused discussion, supported ideally by written information and questions designed to facilitate the conversation. It is an approach to the financial report that is much more than the presentation of a spreadsheet of numbers or tables of figures.

Any of the above financial focus areas could take half the board meeting time or more. The change in financial oversight is a move by a non-profit’s leadership to take board member’s eyes off the numbers and harnesses their minds to other financial issues. Remember, if your board meets 10 times a year you still have 6 left meetings to consider board practices, HR or even mission related matters. I say, wow!

8. Letting go

As regular readers will know, my mission is to encourage boards and executive directors to question the some of the board room routines and myths that seem to dominate governance practice. More importantly, I seek to describe what changes are possible and shine light how these might actually come about.

I am not an accountant but I am pretty confident that the financial reporting alternatives suggested here, although not appropriate in all organizational circumstances, deserve not just consideration, but experimentation.

Your non-profit governing team can break from tradition. And, your board can develop a better understanding of what financial matters need to be monitored, adopt the tools to do it and exercise their responsibility very well. It is not as complicated as it is sometimes made out to be. I hope the above makes the case.

Your Financial Oversight Needs Assessment

Your board’s need for detailed and frequent financial reporting will depend on the level of relative financial stability and good practices that characterizes your organization. If yours can meet all of the following criteria, you may be ready to change up your board financial reporting model.

1. Our non-profit has been operating for five years
2. Our main sources of revenue are reliable ones in terms of the total amounts that comes in and when they are normally received
3. We have a written board approved financial management policy or set of policies
4. We operate with a detailed, program focused, board approved, budget 
5. Our executive director has been in the post for at least one year and has at least two years of financial management experience
6. We have a bookkeeper, or a person who is not the executive director, who helps keeps track of the money coming in and going out
7. We employ a recognized financial management software system to ensure all transactions are recorded and categorized properly and will generate key reports
8. Our payroll deductions are submitted regularly, as required, to the CRA (Canada Revenue Agency).

If you cannot check off all the above, the list will help your board and executive director identify where best to focus their attention.

Endnotes

¹ See the article from The Charity CFO is The Basics of Nonprofit Bookkeeping , 2022

^2. On the subject of accounting see this excellent post by Lisa London, on her site The Accountant Beside You, from January 29, 2015, Five Crucial Elements for a Strong Accounting System

^3. A policy outlining expectations on the acceptance of revenues ought to ensure that the various sources are kept separate. Sources typically include donations, grants, earned income and contracted services . Donations are usually presented as “net figures” that is after fundraising expenses have been counted. For many non-profits fundraising might be an area of management needing its own set of policies.

^4. For more on internal controls see Five Internal Controls for The Very Small Nonprofit (2010) from on my favourite sites, Blue Avocado,  this 2009 piece Proper Financial Controls Can Protect Your Nonprofit by Bob McMahon on Charity Village.

^5. There is a wealth of articles online on calculating program versus overhead expenses. Here is a 2019 one published by Imagine Canada and written by Devon Hurvid. It is titled From Starvation To Celebration: 5 Ways Your Charity Can Help Change The Overhead Conversation.

^6. There are lots of other non-profit budgeting resources to be found online. Budgeting: A Ten Step Checklist from Propel Nonprofits is a good choice. For some advice on the process of budgeting, you could listen to Joan Garry’s podcast interview with consultant Hilda Polanco entitled A Smart Nonprofit Budgeting Process (No date). In my opinion the construction of a one’s annual budget is not normally a job for a board committee, or even a board-staff committee. However, if your organization is new and it is your first budget, a team approach could be a good idea. Check out How To Create Your Nonprofit’s First Budget (2019) on the website Get Fully Funded.

^7. A good overview of the treasurer’s role is this 2019 one Help, I Have been Elected the Board Treasurer” from Propel Nonprofits

^8. The merits of outsourcing non-profit bookkeeping are outlined on two websites. One from Enkel, a Vancouver firm, describes the Benefits of Outsourcing Your Nonprofit Bookkeeping. The other, from the U.S., is from the Jitasa Group, whose byline is “Numbers For Good” The piece is a entitled Nonprofit Bookkeeper vs Accountant.

^9. See this excellent resource on balance sheets, again from Propel Nonprofits in 2022 Balance Sheet Cheat Sheet

^10. To better understand cash flow see Hilda Polanco and John Summers 2020 piece: Cash Flow in the Nonprofit Business Model: A Question of Whats and Whens in the periodical Nonprofit Quarterly

^11. For other takes on financial “red flags” I would recommend three. Here is one from the Nonprofit Risk Management Centre in the U.S.A. It is here. Another I like include this one from Casey Peterson, a financial advisory firm in the western U.S.A. Their red flags include delayed maintenance on physical assets and insufficient investment technology. And here is a third, from a U.S. accounting firm, The Charity CFO, that points non-profit reliance on short term loans.

^12. I covered cash flow analysis above. Here are some additional resources: There is this Guide to Cash Flow Forecasts for Nonprofits in a 2020 piece, a webinar summary, by Flannery May on Charity Village. Propel Nonprofits, a community development focused financial institution based in Minneapolis, Minnesota offers a useful Cash Flow Statement Template. 

^13. Creating a financial management policy or set of policies, a big job as I suggested. I hope my sample financial management policy on this site will make it easier to draft one. Policies need not be perfect so try to avoid getting too caught up in getting all the elements right the first time.