Can your board recognize financial red flags?

A key fiduciary duty of your not-for-profit’s board of directors is to oversee and monitor the organization’s financial health. Some financial warning signs — such as the loss of a major funder — may jump out immediately. But other red flags can be more subtle. Here are some of them.

Budget issues

Certain budget-related issues may hint at rocky financial times to come. Having no budget is a flashing red light and suggests an undisciplined approach to fiscal matters. But assuming management has submitted a budget, your board should ensure it’s in line with board-developed and approved strategies.

Once a budget has been okayed, the board needs to compare it to actual results for unexplained variances. Some discrepancies are bound to happen, but staff should explain significant differences. There may be a reasonable explanation, such as program expansion, funding changes or macroeconomic factors. But your board should be wary of overspending in one program that’s funded by another. Dips into your nonprofit’s reserves, unplanned borrowing or raiding of an endowment might also mark the beginning of a financially unsustainable cycle.

Financial statement problems

Untimely, inconsistent financial statements — or statements that aren’t prepared using U.S. Generally Accepted Accounting Principles (GAAP) or another accounting basis — can lead to poor decision-making and undermine your nonprofit’s reputation. They also could signal understaffing, poor internal controls and efforts to conceal mismanagement or fraud.

Ideally, your board should receive financial statements within 30 days of the close of a period. Larger organizations are generally expected to engage experts to perform annual audits, with the whole board or audit committee selecting the auditing firm.

Subtle signs of trouble

Not all red flags are found in a nonprofit’s numbers. For example, if long-standing, passionate supporters express doubts about an organization’s finances, board members need to take them seriously. Boards also should note if development staff begin reaching out to historically major donors outside of the usual fundraising cycle.

An overreaching executive director is further cause for concern. For instance, an executive might insist on choosing an auditor or make strategic or spending decisions without board input and guidance. Such power grabs could signal dishonesty or financial instability.

Special role

Board members have a special role to play when it comes to a nonprofit’s financial well-being. Make sure your board understands the information they receive and can spot irregularities and warning signs. Contact us for help.

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