Checking Our Organizational Posture: Board Members As Financial Appraisers
Here's a resource from Management Sciences for Health (MSH), to help organizations assess financial oversight. Assessing Your Organization's Capacity to Manage Finances provides some of the key issues of financial oversight. We've include a few of the highlights below and you can find the entire report online.
The Authority of the Board of Directors
In an organizational setting, a board of directors bears the ultimate responsibility for all actions, issues, and processes. Even financial responsibility rests on their shoulders.
Early on in the lifespan of an organization, board members are likely to be focused on policies related to finances, as well as oversee all decisions made related to finances and investments. Over time, the board must shift its focus to adapt to the organization's growth. In doing so, members constantly assess the organization’s ability to accomplish its intended goals by shifting focus to the economic environment affecting it.
Three primary responsibilities propel the board of directors to action:
- The board must collectively decide on the financial goals of the organization.
- In light of these goals, members create and implement financial policies and enforce their practice.
- To protect the organization's resource pool, the board must also evaluate its financial control systems.
External requirements also influence board members' responsibilities. Regulation from the government or donors also require the board to make arrangements for financial audits regularly (often annually) to comply with these provisions.
Creating Specialized Committees
In order to be more attentive to all the financial dealings of the organization, boards may designate a special finance committee largely made up of individuals with extensive backgrounds in financial management.
This committee is charged with the task of creating financial reports that then get shared with the board at each board meeting. Reports must specify financial details including income, expenses, deviations from the proposed budget, any surpluses or deficits, etc. The financial committee, in addition to providing quantified financial data, is also responsible for remedying any issues they come across. If there is a fiscal deviation reported, they should also update the board of directors as to how management is resolving these issues.
Making Sense of Data
The board, in its effort to evaluate the current financial condition of the organization, must be able to make sense of three important documents: A cash flow projection worksheet, a balance sheet, and an income statement.
Cash flow projection worksheet – A document reporting all expected financial obligations and revenues for one fiscal year. Based on the organization's current plan and budget, this worksheet is a projection for the coming year. Therefore, the worksheet is a dynamic document that gets updated every month based on current numbers. The purpose of the projection is to foresee any time periods in the near future when funds may not cover expected expenses.
Balance sheet – This report assesses the organization's current financial situation by summarizing assets, liabilities/debts, and reserves. The board of directors refers to this document frequently to evaluate financial stability and liability.
Income statement (aka profit and loss statement) – Most helpful in assessing whether the proposed budget is lining up with the actual budget of the organization, this report summarizes net income or deficit over time. Overall financial performance can also be measured by comparing a current year's income statement with the previous one. These comparisons are helpful in illuminating any concerns. These may be shared with the executive director in the form of advice to revisit budget plans or attempt to reduce costs in some proposed way.
While management responsibilities focus more on recommending reports, providing information, and proposing change, the board approves the reports, analyzes the information provided, and recommends solutions to issues that surface. In this way, board members have the ultimate authority and responsibility to ensure smooth operations based on the information inputs they receive.
The board should have a minimal degree of financial literacy in making sense of these various documents. These worksheets and statements are the inputs that preempt their conversations and assessments. Board members must therefore be well-informed of the organization's operations, specifically as they relate to financial considerations.
The executive director is largely responsible for making sure that the members of the board, or the board's appointed finance committee, are provided with reports that paint a detailed picture of the organization’s current activities and networks. In addition to the three documents described above, the board should receive on a quarterly basis reports detailing: Current clients, IEC activities and outcomes, fund raising, public and community affairs, and a list of critical issues affecting the stability of the organization.
The board of directors is a strong asset to any organization- including ours here at Firelight. We hope that this informational resource can help your organization understand the role of board members in the financial oversight of operations and activities, ultimately to help your organization meet its goals to have a positive and lasting impact for our global community.