Donna was a confident executive director in all areas but one: finances. Donna knew charitable fundraising, programs, personnel, facilities, and governance. She knew charitable-organization strategic planning, communications, design, and marketing. She also knew how to manage personnel and supervise volunteers. Yet among all those skills, Donna had no confidence in her financial management. She would even tell everyone, I’m not a numbers gal. But she knew her responsibility as executive director to ensure that her organization’s finances were in order. She just relied on a talented finance team.

Finances

Attracting donations is one thing, while managing a charity’s finances is another thing. Getting donations rolling in isn’t enough. A charitable organization must also manage the organization’s finances. Charitable organizations with lots of donations can still have lots of money problems. Financial management includes more than effective fundraising. Indeed, fundraising is a separate responsibility, often assigned to different organization leaders and personnel. The organization may have a Philanthropy Committee or Fundraising Committee supported by a paid development director, as the organization’s fundraising leaders, together with a separate Finance Committee and paid financial administrator. Fundraising is one thing, and financial management another thing.

Governance

A charitable organization’s board governs rather than manages. That distinction is just as true for the organization’s finances as it is for the organization’s programs, personnel, fundraising, facility, communications, and other functions. Yet the board still has a role in the organization’s finances, and that role is to set financial parameters and goals. The board sets the organization’s financial direction, just as it sets the organization’s direction in other areas. The board may, for instance, require annual audits, approve annual budgets, require monthly or quarterly financial statements to review and approve, and appoint a Finance Committee to help the board gather and analyze financial information to carry out those governance tasks. Ensure that your organization’s board sets financial parameters and goals, and confirms that the organization is performing within those parameters toward achieving those goals.

Committee

The makeup of the board’s Finance Committee can be one of the most-important judgments the board makes, in general as well as around finances. The board should ensure that Finance Committee members know numbers and have financial management or analysis skills. They don’t all have to be accountants, but an accountant or two can certainly help. Investment advisors, bankers, lenders, business owners, and bookkeepers on a Finance Committee can also help. But so can a homemaker who keeps a household budget. Appoint keen financial folks with good financial sense to your organization’s Finance Committee, and ensure that the Committee reports regularly to the board.

Budget

The key financial documents that a Finance Committee should obtain, review, and analyze in detail on a monthly or quarterly basis for board review and approval, include a budget or cash-flow statement. The budget compares the donations or other receipts the organization expected to receive and the accounts that the organization expected to expend, against actual receipts and expenditures for the period. Comparison of actual versus expected lets the organization adjust finances timely as the year proceeds, rather than discovering shortfalls in receipts or over-expenditures out of accounts at the end of the year, when adjustments are too late. Skilled financial managers perceive and anticipate trends from slight budget variances, making adjustments before variances become crises. Finance Committee and board review can both hold accountable and guide and inform the organization’s executive director, finance administrator, or other members of the paid staff making day-to-day financial decisions.

Statement

The organization’s balance sheet is another key financial document that a Finance Committee should regularly obtain, review, and analyze to report and recommend to the board. The balance sheet shows the organization’s assets and liabilities, broken down by categories. The balance sheet enables the Finance Committee and board to study ratios indicating the strength, weakness, health, and direction of the organization’s finances, just as much or more so than the organization’s budget. The budget only depicts month-to-month or quarterly data and how the organization’s financial year is progressing. The balance sheet can show how the organization’s finances are changing year to year. It can also show how the organization’s assets are liquid or illiquid and are sufficient or insufficient to address the organization’s liabilities. Some financial managers make greater use of a balance sheet, while others find the key data in the cash-flow statement. Together, the two forms of financial statement make a sound basis for analyzing and managing an organization’s finances.

Preparation

Neither the Finance Committee nor any board members are responsible for preparing cash-flow statements and balance sheets. Preparation of financial statements for Finance Committee and board review falls instead to the organization’s bookkeeper or accounting service. Bookkeepers of any modest skill can usually prepare financial statements, especially when using the common accounting, payroll, and bill-paying software that organizations deploy. Ensure that your organization has a responsible and competent professional making accurate entries accounting for deposits and expenditures, and preparing accurate financial statements, using appropriate software.

Executive

The executive director is typically principally responsible for managing the organization’s finances, just as with managing other functions. The board and its Finance Committee can set budgets and financial goals. But the executive director carries them into effect. Your organization’s executive director should thus have competent financial-management skills, such as being able to read, understand, and to some degree draw helpful information from financial statements, even if only when aided by others connected with the organization who have stronger finance skills. While some organizations have executive directors with no finance skill, that profile can present the organization with management challenges and risks. If possible, avoid retaining an executive director lacking critical financial skills.

Team

The executive director, though, doesn’t have to handle organization finances alone. The executive director may work closely with a bookkeeper or finance administrator, and perhaps also with an operations director, to manage budgets. Financial management in a charitable organization of any appreciable size can take a team that includes the executive, the finance director, and the program or operations manager responsible for reviewing and approving expenditures and controlling hiring and other financial commitments. One supplies the information, another leads, and another executes. That’s what makes a strong financial team. The closer the operations director and executive director are to the finance administrator, the better managed the organization’s finances will generally be.

Plans

At the board and Finance Committee level, financial management certainly includes preparation and approval of the organization’s annual budget. The Finance Committee may use the prior year’s budget as a takeoff point, making appropriate adjustments. Or the Finance Committee may use zero-based budgeting, giving guidelines and directions to the executive director to start over with a new budget from scratch. The executive director or finance administrator may distribute budget-projection worksheets to program staff having budgets to expend, asking for submissions consistent with the Finance Team’s directions and guidelines. The finance administrator can then build the new budget from the completed worksheets, with executive director and operations director oversight, until the executive director has a draft budget to present to the Finance Committee. Encourage your organization’s board and Finance Committee to be strategic in drafting and adopting new budgets. Money allocations can control an organization’s direction. Budgeting is a powerful board governance and executive management tool.

Expenditures

Charitable organizations should have well-designed processes for approving and making expenditures. In organizations of some appreciable size, several staff members may need to request that the organization pay specific bills and expenses. A custodian may need to buy cleaning supplies. A program leader may need to buy refreshments for volunteers. A facility director may need to pay utility and repair bills. On and on the payments go. For an orderly payments process, consider designating one person, such as the executive director or, in a larger organization, the operations director, to sign checks or authorize electronic payments. Staff members needing bills or expenses paid should submit the bills to that designated official with a completed payment-request form including the budget account against which the organization will record the payment. Staff members incurring charges day to day on the organization’s behalf should receive monthly reports from the finance administrator reflecting their budget balances, so that they can keep expenses within budget. The official authorizing the payment can likewise check budget balances. In that way, the organization involves three staff members in every expenditure, the staff member incurring and requesting payment of the charge, the operations director reviewing the request and authorizing payment, and the finance administrator keeping accounts and sharing account balances.

Cards

Credit cards can be a useful tool for managing an organization’s finances. Executive directors and finance administrators should take care in choosing which staff members to authorize to carry and use a card, the maximum authorized balance, and how to control and monitor the card’s use. The finance administrator should distribute monthly credit card statements to each cardholder, requiring that they document each charge with a receipt and a budget account number against which to charge the payment. That way, the finance administrator can post charges to budget accounts, and the cardholders, operations director, finance administrator, and executive director can all monitor card charges out of budget accounts.

Audits

Audits are a common financial tool for charitable organizations to ensure accountability to accounting standards, discourage theft, embezzlement, fraud, or other financial dishonesty, and account to donors or lenders for use of funds. Full, formal audits performed by accounting firms can be expensive, too much so for charitable organizations with small budgets and limited funds. If your organization has a budget smaller than warranting an annual or every-other-year full and formal audit, adopt substitute means, such as a partial audit or limited review by an accounting service or even an informal review by a board member who has accounting experience.

Confidentiality

Charitable organizations may be able to maintain a measure of confidentiality as to their finances. Larger organizations with annual receipts exceeding $50,000 must file a public IRS information return disclosing some financial information, as further explained in a chapter below. Organizations with annual receipts exceeding $200,000 or assets exceeding $500,000 must file a public IRS information return disclosing abundant financial information. Your organization must make those mandated public disclosures available on site for public review on request. But beyond those mandated public disclosures, your organization may maintain its finances as confidential. Doing so may help the organization manage its relationships and preserve and promote its reputation. Don’t feel as if your organization must open its financial books and records to anyone who asks. Your board may wish to do so to auditors, Finance Committee members, or others occupying positions of trust. Otherwise, financial information in the wrong hands of individuals lacking context and good intentions can lead to unwise disclosures resulting in harm to the organization’s relationships and reputation.

Key Points

• Managing a charity’s finances is just as important as raising funds.

• A charity’s board should approve annual budgets and monitor finances.

• The board may rely on a Finance Committee for closer finance review.

• The charity’s executive director is responsible for managing finances.

• The executive director may rely on a finance administrator and team.

• Financial management should be strategic to pursue goals and plans.

• Follow a reliable process for approving and paying expenditures.

• Issue credit cards only to responsible staff who account for each charge.

• Conduct audits if affordable relative to budget or partial review if not.

• Keep finances confidential outside of reporting requirements.

Read Chapter 17.