Assure Prudent Financial Management and Oversight
In nonprofit organizations and churches, Board members have a fiduciary duty of care to oversee the financial management of the organization. This doesn’t mean that the Board must approve every purchase order or walk through every receipt—that would be too cumbersome a process and would likely intrude on the responsibilities of the senior leader and staff.
So, what are the responsibilities of the Board regarding financial management and oversight?
Set the Annual Budget and Review Financial Reports.
The Board, in cooperation with the senior leader, sets the mission, determines the core values, and establishes the goals for the organization, while the staff works to implement strategies and programs to reach those goals and achieve the mission in alignment with the core values. Of course, these programs cost money and require the organization to operate from a budget.
The best practice is for the senior leader and staff to develop and submit the budget to the Board for approval, along with regular financial reports throughout the year. As a member of the Board, each director has a duty to know how to read and understand the organization’s financial reports—not to nitpick and second guess every expenditure, but to make sure expenditures line up with the organization’s exempt purposes and the donors’ intent. To assist the Board in doing that, the organization should regularly provide the board with the following:
Balance Sheet. This is the snapshot of where the organization’s finances stand at any given moment, showing what the organization owns and what it owes.
Income and Expense Sheet. This shows what is coming in and how it’s being used. This may also be referred to as the profit and loss sheet.
Budget Comparison. This may be combined with the income and expense sheet, comparing the income and expense to what was budgeted for the year and the time period covered by the sheet.
It’s important the Board understands the organization’s cash flow, see where the organization started financially and where it finished during the timeframe covered by the reports. This can be its own sheet or combined with the balance sheet or income and expense sheet.
Board members are not expected to be certified public accountants or approve every single transaction the organization or church makes, but Board members are expected to understand the financial reports and ask questions about them to fulfill their fiduciary duties.
Establish a Compensation Policy for the Senior Leader
A primary role of the Board in a nonprofit is to set the compensation for the senior leader, as well as other senior employees. This is important in order to maintain the organization’s tax-exempt status. A three-step process is recommended to assure that the compensation is reasonable (a requirement to maintain tax-exempt status).
First, approve the compensation in advance without the participation of any person who has a conflict of interest, such as the senior leader or any member of his immediate family.
Second, base the compensation on data from comparable organizations in comparable settings. This data should be obtained before setting the compensation, not after in order to defend the compensation. To be clear, the Board uses comparable data as a baseline and may adjust the executive’s salary up or down based on the unique qualifications of the leader and the organization’s setting.
Third, document the decision-making process at the time the Board approves the compensation. The IRS specifies that such documentation should include the terms of the transaction and the date of its approval, the members of the authorized body present during the debate and vote on the transaction, the comparability data obtained and relied upon, the actions of any members of the authorized body having a conflict of interest, and documentation of the basis for the determination.
Establish Effective Internal and External Controls
As previously mentioned, the Board cannot and should not review every receipt or approve every transaction. What the Board can do is approve a purchase order policy, a cash handling policy, the annual budget, a debit card use policy, and other internal policies to protect the organization’s resources. The Board can establish external controls like an annual audit to assure sound practices are in place.
Again, the role of the Board is not to direct the day-to-day expenditures of the organization or church, but to put in place policies and systems that give donors confidence that the church’s funds are being used wisely. As such, donors have more incentive to give to the organization than before.
If you would like more information about how Reynolds Law Group, PLLC can help train your nonprofit or church’s board in its responsibilities call 757.219.2500 or send us an email to assistant@reynoldslawgroup.net to set up an appointment.
Make sure to read the last blog in the series, Seven Responsibilities of a Board, you can find it here: Setting Long-Term Goals.
