The By-Laws of non-profit organizations identify the standing committees of the board of directors and provide for the formation of ad-hoc committees that are created for specific time limited purposes. The finance committee is one of the core committees of a board of directors, and generally it is this committee that prepares the annual budget and reviews the actual monthly expenses in comparison to the project budgeted for the current year.
The purview of the committee’s work often includes longer term financial planning as well as dealing with the status of month to month cash flow. Although the director and the appropriate bookkeeping and accounting staff are responsible for all of the day to day work, the financial oversight is provided by the committee and its members. In selecting the chairperson and the members of the committee it is a good idea to look for people who have some background in finance and understand not only how to read budgets but also are familiar with issues related to cash flow.
The better versed the committee is in the financial realities of operating an organization the more equipped they will be in developing a sound approach to fiscal planning for the agency. In addition to meeting human needs and working to make a difference in the lives of the recipients of the services, non-profit organizations are also “businesses”. Of course they do not exist to earn a profit each month, however, at the same time they are dealing with income and expenses. In order to maintain themselves and to have the confidence of their supporters and contributors, the organization needs to be fiscally sound and not continually show a deficit.
Of course, all of us understand that the issues of cash flow are very important and there are some months where the income exceeds expenses and others where expenses exceed income. It is imperative that the organization plan for these fluctuations and anticipate the impact on its operations. At the same time, there are always extenuating circumstances and unanticipated events that cause “crisis” situations that have to be handled during the course of a year. When an organization has a well functioning finance committee these events are taken into consideration even though every eventuality cannot be known in advance.
For example, organizations that had well functioning finance committees had policies preventing the investment of endowment funds in private investment schemes. When the latest Ponzi scheme was uncovered those organizations did not have funds with firms that were controlled by private individuals and their investments were protected. At the same time, every organization’s endowments lost some of their value when the financial markets began to collapse last year. There were a number of organizations where the finance committee had been aware of changes in the market and had reinvested the organization’s portfolio to limit their liability. Of course this implies there were very knowledgeable and skillful lay leaders who were invested in insuring the financial sustainability of the organization.
In small and medium size organizations the finance committee will handle the various functions including approving the yearly budget; monitoring the monthly expenses; handling investments; and other oversight activities. In larger organizations there are some times separate committees (or subcommittees) for budgeting and investments. Often it depends on how the size of the organization and to what extent there is interest in empowering lay leaders to become actively involved in the financial reality of the non-profit.
Of course, strong trust in the involvement of the lay leaders and their commitment to the agency is a key element in deciding whether or not to invite them to participate in the process of financial planning. When there is trust, as well as, mutual respect people can work together on these very sensitive issues and when there is not sufficient trust, utilizing the expertise of lay leaders and volunteers is more difficult. If the professional feels comfortable with the lay leaders who are participating in approving and monitoring the budget then this strengthens the agency and reinforces the volunteer participation of talented and knowledgeable volunteers. When there is a lack of “chemistry” the participating volunteers are viewed as a “burden” and this does not serve the best interest of either the director or the other staff involved in financial management.
When there is a strong “team” in place it not only insures sound financial planning for the non-profit but also is a seal of approval for potential supporters and donors. When the organization is known for its strong financial oversight it strengthens the organization and assists in building financial sustainability because people are willing to invest in the agency’s future. When steps are taken to increase the financial standing of the organization it will be perceived by others as be a financial sound and responsibly organization. This will add to the organizations credibility in the community and encourage people to support it. In the “lean times” we are experiencing the importance of strengthening the agency’s financial standing cannot be underestimated.
Stephen G. Donshik, D.S.W., is a lecturer at Hebrew University’s International Leadership and Philanthropy Program and has a consulting firm focused on strengthening non-profit organizations and their leadership for tomorrow. Stephen is a regular contributor to eJewish Philanthropy.