How does a board of directors know whether or not it is doing a good job in its role as steward of an association’s resources?
In part, association boards will know how effective their efforts are through the information contained in the financial statement. While these statements won’t typically provide information on specific program achievements or metrics, they will give board members an answer to the ultimate question:
Are members buying what we are selling?
Associations and membership organizations have an occasional tendency to evaluate programs on an anecdotal basis (for example: “This program doesn’t provide value to me”, or “I know some members that really like what we are doing”).
Instead of anecdotal information, financial statements provide bottom-line data on one of the ultimate measures of an association’s performance.
Given that, an understanding of financial statements is crucial to board members understanding both their own performance, as well as staff performance.
And here a few tips to keep in mind:
1. When it comes to financial statements, know what you are looking at.
There are two components to the regular financial statements board members receive from staff.
One component of a typical financial statement is the Profit & Loss Statement, or income statement. This statement shows exactly how an association’s money is being spent, and the revenue the association’s activities are generating.
The Profit & Loss Statement is also where board members can see whether or not the association is running at a profit or a loss.
Board members should also understand what each line item means, and ask their staff if their expenses are within typical association benchmarks.
The other component of a nonprofit financial statement is the Balance Sheet, which shows how much the organization is worth at a given moment. The Balance Sheet has less detail than the Profit & Loss Statement, and demonstrates the overall financial health of the organization.
The board should receive a financial statement (Profit & Loss Statement and Balance Sheet) on a regular, pre-determined basis. Supporting statements are also typically provided, including a Profit & Loss by Class (by programmatic activity, e.g. Annual Meeting), Year-to-Year Profit & Loss Comparisons and Fiscal Budget vs. Actual Profit & Loss Statements.
And, if you see something you don’t understand in any part of a financial statement, say something.
2. Others probably have that same question.
The world of finance contains a lot of jargon. There are terms used when talking about finance that are used nowhere else in business. And, in many professional societies board members may not be routinely exposed to financial statements in their day-to-day jobs.
However, even if members are familiar with the financial aspects of their profession, the world of nonprofit and association finance has its own unique language and terms.
Board members may feel reluctant to ask questions or indicate a lack of familiarity with the financial statement in a board meeting. No one wants to look uninformed in front of his or her colleagues.
But go ahead and ask your question.
The reality is that several of your colleagues likely have the same question, and even if they don’t, each board member has a fiduciary responsibility for the association’s finances.
You can’t exercise that fiduciary responsibility if you don’t know what you are looking at.
So go ahead, ask questions.
3. Profit is okay. In fact, it’s what is supposed to happen.
Nonprofit is a tax designation, not a statement of operating principle. Your association or society should be profiting. Yes, there may be years where a board budgets for a loss due to a strategic investment, but in general an organization must be taking in more money than it is spending in order to remain sustainable.
This can be a surprise to new board members, or board members who have led an unprofitable organization for as long as they have participated on the board.
Read and understand your financial statements.
Ask questions when you don’t understand.
And work with your association staff to become a profitable, financially sustainable organization.