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As an association director, you have a fiduciary responsibility to both your association's members and to the public. It is your board's job to ensure that members' assets are being safeguarded and used prudently. The board reviews and approves financial statements and budgets, determines investment policies and compliance with them, monitors the amount and use of reserves, and makes certain that strong internal controls are in place and being followed. To help you and other new board members exercise your fiduciary responsibility, 5 finance basics are discussed: 1. strategic budgeting, 2. meaningful financial statements, 3. prudent investing, 4. financing the future, and 5. exercising control.

As an association director, you have a fiduciary responsibility to both your association's members and to the public. It is your board's job to ensure that members' assets are being safeguarded and used prudently. The board reviews and approves financial statements and budgets, determines investment policies and compliance with them, monitors the amount and use of reserves, and makes certain that strong internal controls are in place and being followed.

To help you and other new board members exercise your fiduciary responsibility, here are some finance basics that are important to know.

Strategic budgeting

Think of it this way: The budget presents your association's strategic plan in financial terms. The board is responsible for ensuring that your organization truly is using its resources-cash, people, equipment-to further its purpose. Staff prepares the budget based on history, expectations, and your board's strategic direction. The board, then, must be satisfied that the income and expense assumptions in the budget are reasonable and that the way in which resources are allocated is consistent with your organization's strategic direction.

Meaningful financial statements

Financial statements tell the association's story in dollars and cents. You, like all board members, must understand these important documents and question any numbers you don't understand. One sign of how important the board's role is: Although auditors rely on financial statements provided by your association's management and staff, they address their audit or review report to you on the board of directors.

Monthly financial statements are a meaningful tool that you should be able to rely upon to help manage your association. Some organizations share these only with the finance committee; others give them to the full board; still others distribute such information to the board periodically during the year. Regardless of when you receive them, a few elements will remain the same. As you're probably aware, the statement of activity (income statement) shows the organization's performance for a specific period of time. The statement indicates this time period with words such as "for the month ending June 30, 2000" or "for the six months ending June 30, 2000."

But unless you know how the association should be performing, the numbers won't mean much. As a result, monthly income statements should show actual activity compared to budget, and staff should be able to explain fully any major variances-- positive or negative. It is also useful to compare current performance with the prior year's, again with explanations for major variances.

The balance sheet gives a snapshot of the association showing assets, liabilities, and net assets as of a certain date. Net assets are assets minus liabilities, comparable to a for-profit organization's fund balances, equity, or net worth. Net assets represent the organization's activity since its inception. The balance in net assets is the prior year-end balance plus the net income earned during the current year. Pay particular attention to working capital (cash and current receivables available to cover current liabilities) and to the aging of receivables and payables.

Prudent investing

The challenge for any association is to protect its members' assets by achieving maximum return on investments with minimum risk. It's the board's responsibility to establish and monitor compliance with the investment policy. Even though you may be willing to take certain risks with your personal funds or those of your company, you will need to be more risk-averse when investing your association's assets. Your investment manager can work with your board to define acceptable risk levels, target balances, asset allocation parameters, and timelines for maturity of fixed income securities. As assets increase or decrease, your board must be confident that your association's investment guidelines are still meaningful.

Financing the future

It is only prudent for your board to ensure that your association has enough reserves to meet future challenges. For example, an economic downturn might occur. A new building or major equipment upgrade could be on the horizon. Or opportunities may arise to invest in new ventures or spend significant dollars to fight the good fight for your members' interests.

To finance such needs, your association must have money in the bank. That's why it's vital for your board to analyze your association's reserves. You do ask such questions as, How much money should our association set aside? Under what circumstances will we spend our reserves? How and during what time period will we fund the reserves? What investment guidelines will we use for these funds?

Periodically, your board must also review progress toward the reserves goal and review the policies and guidelines governing how your association establishes and manages the funds.

Exercising control

Strong internal controls safeguard against fraud, misuse, and waste. As part of the audit procedures, a CPA firm will review internal controls and report areas of weakness to your board in a management letter. Even in the smallest association, you can institute checks and balances to protect your organization. You must be satisfied that a sound internal control system is in place.

To fulfill its fiduciary responsibilities, your board must see to it that your association possesses two things: 1) timely and accurate information showing how your organization is performing against its strategic plan and 2) policies that allow for prudent use of member assets. If you have these in place, you can be confident that your board is leading your association wisely.