Why Board Members Need to Understand Financial Statements

Financial Statements for Board Members

The Importance for Board Members to Understand Financial Statements

By Leslie Milton, CPA, CA, LPA, Associate Partner

Interested in learning more about what financial literacy knowledge you should have as a board member? Check out our other articles on Financial Literacy, including:

Why Board Members Need to Understand Accounts Receivable | Why Board Members Need to Understand Accounts Payable | Why Board Members Need to Understand Deferred Revenue and Contributions

Board members are often bored (or occasionally sleeping) during the financial discussion or financial statement presentation at a meeting. If they are lucky, they have someone with a financial background as a treasurer or chair of the finance committee, and assume that the finances are in good hands.

If you are a “bored” board member, this article addresses how the financial process of your organization should operate and how it impacts you because you share the responsibilities for ensuring that proper financial controls are in place.

The Budget Process

A well-considered budget is a key control for any non-profit organization.

The budget should be prepared before the year begins, and is a representation of the results the organization expects to attain the following year. Setting aside the mechanics and processes of budget development, every board member should be able to look first to the bottom line of the budget to see what the expected result should be.

If the year-to-date budget and actual results are showing a net result close to the budget, then you can have some confidence that there have been no negative changes in the operations of the organization. However, if the results for the period are a significant variance from the budget, then you should be asking questions as to why and what is being done to correct the situation.

Frequency of Financial Information

Ideally, financial information in the form of monthly interim statements should be provided to the board. If a board is meeting other than monthly, questions to ask are: Who is reviewing the internal financial statement in the off months, and what processes are in place for reporting on deviations from expected results?

Every board member can appreciate that if something goes wrong financially, and the board only finds out about the issue three months after the fact, the organization has lost precious time in responding to the situation.

Forecast Based on Financial Statements

Another key question to ask relates to unexpected changes in the budget for the balance of the year. For example, if you were expecting a grant in the last quarter of the year that fails to materialize, a proactive board needs to have a process in place to determine how best to protect the overall financial health of the organization.

But remember, if you take on the responsibilities of board membership, you are also taking on the responsibility for the organization’s finances. There is no place on a board for members who are willing to leave that ‘money stuff’ to others.