With the possible exception of “How can I avoid fundraising?” the most common question trustees tend to ask themselves is, “What do all these numbers mean?”
I bet you’ve experienced that dreaded board meeting moment. The financial statements are distributed, the treasurer offers a few remarks, and then asks, “Any questions?”
A long, awkward pause. Lacking financial training, many trustees don’t really understand the spreadsheets. They may feel too embarrassed to say, “I don’t even know what questions to ask.”
Even worse, somebody jumps in to pick apart a specific line item. “Why aren’t we shopping at MegaStore? We could save $50 on office supplies.”
If you’re looking for a model of fiduciary responsibility, this is NOT a great example.
Fiduciary responsibility? What’s that?
In this blog, we’ve covered many dimensions of board leadership – especially fundraising – but one essential aspect is written into the law governing nonprofit organizations: fiduciary responsibility.
These are big words, and they don’t mean simply approving a budget or signing off on an audit. In the deepest sense, accepting fiduciary responsibility means integrating financial thinking into every aspect of board governance.
If you don’t know the financial information by heart – if you’re not marinated in the numbers and understand why they’re important – it’s impossible to exercise that responsibility.
The dinner party finance quiz
Imagine you meet an acquaintance at a dinner party. Because you’re a good ambassador, you seize the opportunity to share your enthusiasm about your organization.
Because she’s a businessperson, and thinks a lot about financial sustainability, your acquaintance responds by asking lots of probing questions about your group’s finances.
Could you answer these questions?
- What is your organization’s annual budget?
- What are your current sources of income – and what would be the best mix of income for your organization?
- What are your largest expenses? What percentage of the budget do they consume?
- Does your organization have a reserve fund? How much is in it, and under what circumstances can it be used?
- What is your biggest financial risk?
- How do you use financial management tools to measure your impact? Does your organization compute the cost per unit of service: for example, for each client you help, or audience member you entertain, or acre you protect?
- What would help you better understand your organization’s financial situation?
Finding the right altitude for board oversight
Notice the “altitude” of these questions. They don’t address specific line items in the budget, but rather larger questions about your organization’s business model, impact, and sustainability.
For example, where does the money come from? Where does it go? How do we know? What impact are we creating by using that money? What are the risks we face?
How did you score?
Can you answer all these questions with confidence and clarity, and do so without shuffling through a pile of papers? If the answer is yes, then you understand the concept of fiduciary responsibility.
Consider giving this quiz to your board; you can download it here. It’s a great way to begin a financial management workshop.
Indeed, if you and your colleagues need help answering these kinds of questions, consider financial training as part of your annual board development plan.
For a lot more information on this topic, take a look at The Board Member’s Easier Than You Think Guide to Financial Management, which I wrote with my colleague Nancy Wasserman.