Financial Concerns for Board MembersCARYN RYANFOUNDER AND MANAGING MEMBERMISSIONWELL LLC

Today’s workshop: One key to strong board governance is making decisions regarding your organization’s finances. Board members have to help navigate through different life cycles and varying levels of complexity during their tenure. By the end of this session, attendees will (1) identify the life cycle and state of complexity their organization currently finds itself (2) make educated predictions of financial concerns that may arise and (3) draft strategies to begin or continue strong financial management.

Roles of the Board Member: All these roles are enhanced by applying a financial lens (and hurt if that lens dominates the discussions)

Fiduciary Role◦ Good faith, Loyalty, Care◦ Succession planning, CEO performance management

Strategic Role◦ Mission, Vision, Values◦ Priorities and goals

Generative Role◦ Perceiving, discerning◦ Envisioning alternatives to the present

Fiduciary role: Financial knowledge is key component

Attendance and preparation

Ask questions until you understand the organization’s financial statements

Financial transparency policies◦ GAAP - standard for preparation of financial statements

Financial governance policies

Expertise in audit and finance on the board

Strategic and Generative Roles: Financial lens strongly supports both

Examples of Support to Strategic role:

Business model clear in your mind

Resourcing decisions tied to mission, impact strategy

Financial projections tied to strategy

Examples of Support to Generative role:

Can’t happen if organization is in financial crisis

Sense of self enhanced by clear understanding of business model

Planning for uncontrollable risks often encompasses policy issues on reserves

Translating big ideas to financial impact can spur creative thinking

Table Discussion Question A fellow board member expresses to you that his/her giftedness is not in the area of finances and asks if he/she can just rely on the financially-oriented board members.

What is your advice and why?

Understanding financial statements: Your actions TRANSLATE into the financials

• Mission focused• Policies• Alternatives• Risks vs. Benefits

Make Decisions

• Securing resources

• Implementing programs

Perform Activities • Revenue and

expense• Assets and debts• Cash flow

Financial Results

ASK if they translate mysteriously!

Your concerns revolve around those actions and how they translated financially

The only real question: Are you making a difference?

Your review of the financial results and projections is actually asking:

◦ Were decisions good?◦ Were they well implemented? ◦ Helps answer the “real” question –

though not the whole answer

This doesn’t require detailed knowledge as a board member.

◦ Find the large value issues - Not that many, stay out of the minutiae

◦ Wisdom more important than specific expertise

Are

you

mak

ing

a di

ffere

nce?

Are you profitable?Are you doing better or worse?Can you survive the coming storm?

Board questions are quite different based on lifecycle of the organization

Focused questions and acceptable answers vary by life cycleWhat is normal in one stage can be abnormal in another stage◦ As an example, for an organization in its infancy, a severe shortage of cash is normal whereas for an

organization in its prime this could be a very negative indicator

Board members require clarity on where the organization is in the life cycle, in order to:◦ Ask the right questions◦ Spot when times are changing and new questions are required◦ Target moving the organization backwards or forwards in the life cycle to a better place

This understanding of financial issues based on lifecycle will make you a more impactful board member

Lifecycle of the organization

Source: Managing Corporate Lifecycles,Adizes

Participant Question:Where is your organization in the lifecycle?

Understanding financial basics is critical to being an effective board member

Irrespective of where organization is in life cycle

Next series of slides show financial concerns of organization in its prime◦ This assumes all the information you have to work with is what is in the board package and your general

knowledge and understanding of the organization◦ We’ll come back to other parts of the life cycle◦ Everyone is driving to get to Prime so this is still applicable to you if you are in a different part of the life

cycle

I get a lot of material in my board packet – which documents are financial statements?FINANCIAL STATEMENTS

Financial plan within business plan “pro forma”

Budgets and projections .

Financial results in fiscal year

Audited financial statements

Form 990

HOW DO THESE ASSIST YOU WITH YOUR DUTY OF CARE?

Understand prior to approving strategy, including “what ifs” testing for risks

Ensure resources “in” match expenditures “out”

Accountability for decisions made

Transparency and assurance, attract resources

Benchmarking, transparency, compliance with exempt status

Statement of financial position What is it?

◦ Snapshot in time◦ “Balance Sheet” in for profit language

◦ Assets – Liabilities = Net Assets (Net Assets replaces Equity section)◦ Unrestricted (Board Restricted)◦ Temporarily Restricted◦ Permanently Restricted

Key Questions of the Board MemberStatement of Financial Position

Are you profitable?

Restricted fund balances positive?

Working capital positive?

Are you doing better or worse?

Net assets stable or growing year

over year ?

Are you prepared for

the next storm?

Unrestricted cash adequate?

Debt not excessive?

Are

you

mak

ing

a di

ffere

nce?

Statement of Activities What is it?

◦ Revenue – Expenses = Change in Net Assets◦ Revenue may be earned fees or support/gifts

◦ “Income statement” in for-profit language◦ Over a period of time ◦ Explain change in net assets by category

Key QuestionsStatement of Activities

Are you profitable?

Positive bottom line? Positive

margin?

Profitability by key activity acceptable?

Balance of unrestricted vs.

restricted income?

Are you doing better or worse?

Expenses pacing with revenues?

Vs budget and prior year, strengths and

soft spots?

Trend of deficits?

Are you prepared for

the next storm?

Diversification of revenue?

Managing cost of “Heart” projects?

Are

you

mak

ing

a di

ffere

nce?

Statement of Cash Flows What is it?

◦ Converts results to cash basis◦ Cash broken down into three activity sources:

◦ Operations◦ Change in Net Assets + non-cash items + change in working capital

◦ Investing◦ Financing

Key QuestionsStatement of Cash Flows

Are you profitable?

Positive change in cash this

year?

Positive cash flow from

operations?

Are you doing better or worse?

Vs. Prior year, spot risks and opportunities

?

Cash balances trending up?

Are you prepared for

the next storm?Cash

operating reserve

adequate?

Able to fund growth/

investments?

Are

you

mak

ing

a di

ffere

nce?

All the other financial statements are just variants of these basic ones

Financial plan within business plan “pro forma”• Projection going out multiple years, not actual – might be incremental for project• There should be a good reason if formatted differently than financial statements

Budgets and Financial Outlooks• Projection, not actual – shorter term, typically 3-24 months• There should be a good reason if formatted differently than financial statements

Audited Financial Statements• More formal format (GAAP) – ASK to see how items map if differences material

Form 990• Functional breakdown of statement of activities with allocations• Ask if the basis for any items is different

Exercise Sample financial statements

Take 10 minutes at your table and come up with your concerns and questions

Organizations often create a Finance Committee when risks get significant

FunctionRole of Finance Committee

Role of Board of Directors

Annual financial statements (may be audited) Recommend Approve

Interim financial statements Review n/a

Fiduciary reviews of benefit/pension plans Approve Information

Selection of auditors (if audit performed) Recommend Approve

Annual Budget Recommend Approve

Long range financial plan Recommend Approve

Investment management Approve Information

Financial policies Approve Information

Corporate policies Recommend Approve

Organizations somewhere else on the lifecycle

Next slides detail financial concerns in other phases

Courtship Description

An idea or a passion and a commitment to make it into something

Financial Concerns

Where’s the cash?

Reality testing: There is never enough cash but are there identified investors?◦ Why not enough investors? Product or service issue? ◦ Does the founder have the ability to attract the necessary resources?◦ Appropriate risk taking, eg, avoid overinvesting and underinvesting

Is there sufficient separation of founder’s personal finances from organizations’ finances?◦ Count loans, start up capital, early gifts from family and close friends as “personal”◦ Check ratio of personal to unrelated

Policies:Conflict of Interest

Infancy Description

◦ Passionate focus on a mission (“why”)◦ Shoestring operation with insufficient capital◦ Passion extends across those involved in organization

Financial Concerns◦ Setting expectations - Business plan reality testing ◦ Weekly cash flow monitoring – balancing growth with cash availability?◦ Evidence there are users or buyers of the product/service?

◦ In a reasonable quantity?◦ At a reasonable price?

◦ Evidence of UNANTICIPATED negative cash flows

Policies:Gift AcceptanceTravel/EntertainmentAccounting PolicyExecutive Compensation

Go-go Description

◦ Momentum achieved - The organization is building programs, bringing in new clients/customers. ◦ No such thing as problems, only opportunities◦ Significant growth in deployment of products and services – add more and more

Financial Concerns◦ Growing but so is the deficit?

◦ Are cost controls adequate? ◦ Extending reach beyond resources?

◦ What’s the right pace of growth?

◦ Are revenue streams properly identified (business model) for each product/service?◦ Are revenue forecasts consistently met, or learned from?

◦ Is the budget sufficiently detailed and accurate to force problems to surface when/if not meant?

Policies:Human ResourcesDocument Retention

Adolescence Description

◦ Life apart from founder(s)◦ Focusing the products and services◦ Still growing products and services◦ Inadequate infrastructure – people, processes, systems, policies

Financial Concerns◦ The THREE QUESTIONS now apply! In addition:◦ Does this organization have the appropriate boundaries and empowerment?

◦ Delegation of authority, Financial controls, Accountability systems◦ Is a Finance Committee, Investment Committee or Audit Committee needed?

◦ Emerging squeeze on margins may indicate need for renewal strategies

Policies:InvestmentsBankingRisk Management

Prime Description

◦ Vision and values, sense of purpose, integration beyond organization◦ Institutionalized governance◦ Conscious goals, focus, priorities◦ Functional systems and structure◦ Focus on growing services/products AND profit

Financial Concerns

In addition to the three questions:◦ Is there adequate focus on efficiency? ◦ If not in place, is a Finance Committee, Investment Committee or Audit Committee needed?◦ Emerging squeeze on margins may indicate need for renewal strategies

Declining years Description

◦ Cautious, risk avoidance, respect for rules, authority◦ Focus on rewarding “how” not “what”◦ Decreased flexibility◦ Fear replacing faith◦ Asking permission replacing asking forgiveness

Financial Concerns◦ How is organization investing the surplus cash? Why?◦ Ratio of administrative to direct service providers◦ Indicators of adequate risk taking – declining investments relative to cash and profit◦ Too much focus on finance and legal at expense of mission◦ High ROIs symptomatic of end of program and need for rebirth?◦ Delicate but honest conversations on endings

“When things stop growing they start to die.” Charles Gow

Reflection & Moving Forward Are you feeling better equipped to ask the right questions?

What else would you need to do so?

What resources might help you get there?

Resources/References Good Governance for Nonprofits, Frederic L. Laughlin and Robert C. Andriga

Boards That Make a Difference, John Carver

Nonprofit Sustainability, Jeanne Bell, Jan Masaoka and Steve Zimmerman

The Five Most Important Questions, Peter Drucker et al

Managing Corporate Lifecycles, Ichak Calderon Adizes

Great by Choice, Jim Collins and Morten T. Hansen