Talking Finances with Your Board
As the COVID-19 pandemic rapidly remakes our world, nonprofits are grappling with the financial turmoil. Unfortunately, many Boards of Directors spend too much time looking backwards—reviewing statements from past periods and comparing them to an ever more dated budget—and not enough looking ahead. The result can be a deep divide between where the Board is spending its time and what's most important to the organization. Here’s how you can narrow the gap.
Three (3) goals of Financial Reporting. Focusing the Board on your financial future does not mean abandoning its duty to hold senior staff responsible for past performance. But rather than a stand-alone function, that oversight is a central aspect of the Board’s financial engagement that should address three mutually reinforcing priorities:
Accountability. Board oversight of nonprofit finances is a foundational aspect of the Board’s legal obligation as a nonprofit’s governing body and central to the organization’s stewardship obligation to funders, constituents, staff and the broader community. While accountability isn’t everything, it remains vitally important.
Alignment. The Board and staff should be moving in the same direction, with a common orientation towards objectives, assumptions, risks and the operating environment. The adoption of the budget is a critical starting point for ongoing alignment. Periodic financial discussions are invaluable opportunities to update these shared understandings, increasing confidence that staff is guiding the organization appropriately, and providing a more meaningful basis for accountability.
Confidence-building. Trust is fundamental to the delegation of financial management. The greater its belief that staff leadership is worthy of that trust, the higher the Board’s level of comfort, the greater the alignment. Financial reporting is an opportunity for staff leaders to build and sustain that confidence by demonstrating their capacity to financially shepherd the organization.
Designing the Financial Report.
An accountability-only mentality can lead both staff and Boards to take a “more is better” approach. Reports become weighted down with details that, in their abundance, can obscure patterns and other larger concerns. Presented with details, Boards naturally focus on—details. Combining alignment and confidence-building goals with accountability requires thinking differently about what is presented to the Board. Clarity becomes more important than volume, so reports become shorter, simpler, easier to prepare, and easier for the Board to digest. Reports will have two parts:
A simple historical report that prioritizes the most important aspects of what already happened and resets alignment where earlier expectations were not met (for better and for worse).
Future guidance that starts with an up-to-date analysis, reviews and updates existing expectations, and provides a tentative roadmap to the rest of the fiscal year.
Historical reporting. Reports generally cover a period ending at least a month or two before they’re presented. In addition to its importance from an accountability perspective, the report helps to bridge the alignment that existed when the budget was approved to the present circumstances by explaining how that present came to be. To the extent that the report demonstrates staff’s understanding of what has occurred and its ability to make good decisions through evolving circumstances, it will strengthen the Board’s confidence in management.
Keep it simple. Your P&L (profit and loss) statement and balance sheet should summarize your chart of accounts, not reproduce it. Each should have few enough rows to fit comfortably (at a readable font size!) on a single sheet of paper. Rarely should your P&L include a separate line for any expense category smaller than 1 or 2% of the total budget. These can be consolidated as “Other Expenses” or “Miscellaneous Expenses”.
Provide context. The results presented in a financial report are not intrinsically meaningful. Identical numbers can reflect either excellent or terrible financial management. Extracting meaning starts with understanding how the numbers for the current period relate to other numbers. To provide that context, use these six columns:
The Balance Sheet can be presented with four columns:
Identify meaningful variances. Ultimately the financial report must answer two questions:
What is different from what was expected (in the budget)?
Why did this difference occur?
Nearly every line will have at least some variance, positive or negative, but very few will be worthy of the Board’s limited time and attention. Variances can be significant either on a percentage basis, above a fixed dollar threshold or because of their importance to meeting organizational objectives.
The Future is What Matters.
Engaging around the future has substantial potential benefit—increased confidence in management’s financial leadership, improved alignment and maybe even that ever elusive thought-partnership we’re always reading about. At the same time, staff leaders have legitimate concerns about talking with the Board about what’s up ahead. The alignment achieved in an approved budget may have been hard won, and staff leaders may be reluctant to open fresh wounds. Setting new expectations means creating new opportunities to disappoint, especially with a Board inclined to find fault. Staff leaders may reasonably worry that a more engaged Board will encroach on staff turf. Plus, all of this takes time and energy. These challenges are all manageable, but they can be intimidating.
Ultimately, however, the future will become the past and Board members that have not been prepared may be in for a rude awakening. If they’ve become accustomed to hearing that all is well, and that variances can easily be explained, how will they handle the sudden news of shortfalls, overspending or requests to allocate reserves? I know how I’d react.
Constructive discussions about upcoming financial projections should include:
Current status. Update the historical P&L with results from the latest month, even if their tentative. This provides a better starting point to talking about the future then the historical report, which is usually a minimum of six weeks out of date.
Forecasts. Share your best current estimates of what the rest of the fiscal year will look like. If cash flow is an issue, use a cash flow projection. If cash flow is not a problem then the projection should be prepared on the same basis as the budget, usually accrual—to facilitate comparisons. To keep things simple, don’t share both.
Risks and concerns. A sunny financial view of the future may calm some Board members but it will raise flags for those who are more sophisticated. What could go wrong? How are you planning to address it? Part of staff’s job is to worry so the Board doesn’t have to. By identifying risks and sharing concerns, you demonstrate vigilance and inspire confidence.
Future decision-points. What challenges are up ahead that may require you to diverge from the budget. How are you getting ready to make these decisions? Territorial concerns aside, previewing decisions gives Board members an opportunity to express their thoughts on the issue, giving staff a heads-up to possible objections.
Practice tips. Moving a Board to a future-focused orientation will take time, courage and creativity. So best to start right away! At least some of the following may help to get the ball rolling:
Engage your Board. If part of the problem has been that they’ve been too passive about finances, then you’re not likely to change the dynamic by dictating what the change needs to look like. Discuss goals, recommend initial steps, invite input on the front end and regularly solicit feedback about how well about how best to meet these goals.
Partner with the Treasurer, Board Chair and/or Finance Committee. Not every Board member will have the aptitude or energy for more nuanced financial discussions. Board members with idiosyncratic concerns need to be managed, so that they feel heard and their views are taken into consideration by their colleagues, but also so they don’t hijack the meeting.
If you’re spending significant time putting together financial reports for your Board, you’re doing it wrong. Share an appropriate subset of information that you are reviewing on a regular basis.
Pretend that written reports will be read. Use discussion time to talk about issues that need to be discussed rather than summarizing.
Avoid votes unless formal Board authorization is required for a particular action. Voting can undermine both management accountability and the alignment process by focusing on the unhelpful issue of who gets to decide.
When explaining variances, don’t be defensive. Taking responsibility inspires confidence so err on the side of explaining discrepancies in terms of your actions—“I failed to anticipate. . .” “I assumed . . .” “I shouldn’t have budgeted. . .”
You don’t need to anticipate every single question that might be asked (and preparing to do so is a poor use of your time). Promising a timely response—and then providing it—is perfectly appropriate in most situations.
The words “leading” and “managing” are future focused—where do we want to go and how we get there from here? That’s what you should be discussing with your Board.