Sexy financial statements - Are you kidding!?

On a one to ten scale of what's sexy or exciting, financial statements generally rank at about minus one for most nonprofit board members. Nonprofits still in the early growth phase may not fully understand the relationship of the board's financial or fiduciary responsibility to their overall governance role. There may not even be a formal accounting system in place.

Board members, whether nonprofit or for-profit, typically aren't finance or accounting majors. I can clearly remember sending out the financials to the board members of a small nonprofit in advance of an annual meeting. One of them called and very nicely but sincerely told me that I shouldn't waste postage and paper sending them to him in the future, since it was all "just so much gobbledygook to me". When I explained that I was required to send them because the board was responsible for understanding the financial position of the organization, he asked if I could just tell him where on the papers he could see whether the organization was making or losing money.

This is an all-too-common reaction to the financial portion of a board agenda. In many cases, once the board meeting starts, the chairperson asks if anyone has any questions or comments, and then there is a voice vote to accept all the financial information as written. It's almost a Pavlovian response.

Fiduciary oversight isn't optional.

The problem with that is once you vote to accept the financials, you are effectively saying that you know what's in them. If something is amiss, you can be held responsible for any problems.

For those nonprofits that say they don't need financial statements due to their small revenue streams, or because they are about mission, not money, listen up. If you are a nonprofit corporation, you may be required to use the accrual method of accounting. That means you do need some sort of basic accounting system that can produce financial statements. Leaving the tax man out of it, prospective donors and grantors expect it as well.

Most board members don't intentionally shirk their fiduciary duties, and they are not too lazy or mentally incapable of understanding financials. Financial reporting is simply a foreign language to them. Sometimes they are successful professionals in other fields, but they rely on a staff of accountants to keep the books and synopsize any findings. Other times they are community members whose closest brush with accounting is when they file their taxes. Sometimes they just don't understand the legal impacts of rubber-stamping the financials.

Ignorance isn't bliss.

Not knowing what's contained in the financials is not a defense. Shareholders, members, donors, and the IRS won't accept that as a reason if there is some sort of mismanagement, fraud, or other illegal act discovered. The solution to that is developing a basic ability to understand the financial statements.

There are a number of mini-courses, books and video presentations available that offer financial training for non-financial people. Think of them as sort of a pocket dictionary for another language. When you travel to another country, you may not need or want to know how to carry on an hour-long conversation in another language, but you do need to know how to ask for a doctor or a bathroom.

No degree required.

This isn't about becoming a certified financial professional and to some extent, it isn't even about that much argued-over bottom line. Depending on your board composition, even a one or two-hour presentation can be sufficient to provide all the knowledge most board members need.

Local associations of financial professionals often have seminars that can be scheduled into a retreat or executive training session. In a pinch, you could even have a independent accounting professional or instructor attend a board meeting and explain the financials once a year. The goal is to be sure that everyone has at least a basic understanding of what to look for relative to seeing problems or trends. The purpose of reviewing financials isn't to check the math, it is to obtain operational guidance for the board.

Financials are more than just numbers.

The purpose of this instruction is not to turn the board into bookkeepers or accountants. It is simply to provide a way for the board to recognize problems or trends. For instance, if the depreciation figure is significantly different from last year or the last quarter, does that mean that something new was purchased?  If so, what is it, what did it cost, and is that cost reflected elsewhere in the financials? If not, why was the figure adjusted? If it is significantly lower, does something need to be replaced because it is too old to function properly anymore? Does that affect net worth?

Financial statement training isn't very sexy, but going to jail or watching your organization dissolve in bankruptcy isn't much fun either.

For many organizations, November is approaching the end of the fiscal year. Think about offering financial statement training as a year-end training camp or informational webinar. Some members might even consider it a perk!