Essential Nonprofit Financial Governance – Frequently Asked Questions (FAQs)Posted on October 14th, 2020
We will cover 15 commonly asked questions and mis-perceptions of financial governance. Please provide this to your board and especially new board members and leaders to help educate them on the roles and responsibilities on Nonprofit Leadership and Governance. Please register for our November forum to review this topic in more detail and invite your board treasurer, finance committee, and leaders.
- How many board members should we have? At least 5-9 members which are unrelated to each other.
- What should be discussed during a board orientation? Mission, organization chart, bylaws, audit and form 990, responsibilities and expectations including fundraising, and frequency of board and committee meetings.
- Are there best practices for planning and conducting meetings? Draft agenda in advance and be strategic and focus attention on priorities. A consent agenda can be a good tool to move through routine procedures and information that can be provided prior to the meeting.
- Do I have to have an audit or finance committee? Organization’s benefit from a finance committee and may benefit from an independent audit committee. It is important to have the right financial experts to move you in right direction.
- Do I have to have accounting or finance experience to serve on a board? A successful board is generally made up of diverse individuals who are focused on furthering the mission of the organization. Board members may need training to fulfill their fiduciary responsibilities. It might be best for these board members to not serve on the finance or audit committee however.
- Are Not-for-Profits supposed to have term limits? Term limits seem to be a good idea yet make sure you have a staggered term process to support continuity and prevent large turnover of board members. It might be import to change the responsibilities of long-term board members to keep them engaged and refresh their duties.
- Is it common for board members to have fundraising expectations? Asking board members is very common and especially expected if donations is a major revenue source. It is always a good idea to know the fundraising expectations and make sure you are comfortable with the commitment.
- What is a conflict of interest? a conflict of interest arises with a board member has a transaction with the organization. Transactions should be discussed and possible disclosed before they take place. A robust conflict of interest policy covering the financial and non financial conflicts is a means to establish procedures that will offer protection against charges of impropriety involving officers or directors.
- Are not-for-profits required to have an annual audit? It depends on many triggers that may cause or require an audit. Receiving federal or state funds over certain thresholds can trigger audit requirements. Some foundation grants may have audit requirements as well. Some organization’s may choose to have an audit even when not required to demonstrate good financial stewardship and transparency.
- What alternatives exist to an annual audit? A review typically costs 50-60% of an annual audit. A compilation is another option but does not provide a basis for obtaining or providing assurance regarding the financial statements.
- What should board members know about the Form 990? It is a public document and should be reviewed by the board before it is filed with the Internal Revenue Service. Board members should fully understand and verify the information on the Form 990, and should feel comfortable asking questions until they are satisfied.
- Am I required to post my financial information on my website? There is no federal requirement to provide your financial information on your website. The IRS requires you to make your Form 990 publicly available. In the interest of transparency, it is considered a good industry practice to post the IRS Form 990 and the annual financial statements. The annual financial statements might be the audited financial statements and/or the annual report.
- Should we have an operating reserve? An operating reserve is a valuable tool to manage changes to the finances. By building and maintaining an operating reserve, an organization can better manage its cash flow on a day-to-day basis.
- How long do I keep my financial records? There is no easy answer for this as many laws are state specific and federal government grants may have specific requirements for document retention. A formal document retention and destruction policy is considered an important best practice.
- Are not-for-profits allowed to make a profit? They should and a modest surplus maybe a good goal as well. This will allow the organization to build up reserves and helps to contribute to long-term financial sustainability. The term not-for-profit comes from the fact that the organization exists to benefit the public and has no owners.
Please be advised that this is only an introduction to financial governance and does not address all the areas that an organization should be concerned with. We would be glad to assist your organization with training and make sure you meet the requirements of financial governance and leadership.