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Understanding the association's financial operations is critical, especially given increased public scrutiny of for-profit and nonprofit organizations in recent years. You have a fiduciary responsibility to ensure that the association has adequate financial resources to accomplish its mission and that sound financial policies and procedures are in place. Every association should have financial policies and procedures, spelled out in formal policies-and-procedures manuals, to protect its assets and dictate how finances are to be managed. In addition, financial policies should specify the types and amount of insurance the association must have to insure its assets and operations. Financial statements report the association's financial activity and results of operations. All financial statements should be accurate, easy to understand, and produced in a timely, consistent manner. These statements are typically prepared internally every month and forwarded to the board or appropriate committee for review monthly or quarterly, according to the association's needs.

Undcrstanding the association's financial operations is critical, especially given increased public scrutiny of tor-profit and nonprofit organizations in recent years. You have a fiduciary responsibility to ensure that the association has adequate financial resources to accomplish its mission and that sound financial policies and procedures are in place.

Start with an orientation

To gain an understanding of your association's financial operations, request an orientadon session with the chief staff executive or chief financial officer. This should include a review of your association's objectives and goals; its programs, products, and services; and its financial practices and procedures. Request and review copies of the current and prior-year financial statements, current-year budget, investment policies, and the financial policies and procedures manual. Also ask for a copy of the most recent audit and management letter. If the management letter included any recommendations for improving internal operations, determine whether those recommendations have been implemented.

Nonprofit organizations must report the results of their efforts to the public and to federal, state, and/or local agencies. They do so by filing an annual Form 990 federal tax return, and by producing and distributing annual reports ami other reporting documents. Review your association's most recent Form 990 and, if applicable, the annual reports for the past two to three years.

Financial policies and procedures

Kvery association should have financial policies and procedures, spelled out in formal policics-and-proccdures manuals, to protect its assets and dictate how finances arc to be managed. Effective financial management should include processes that ensure the prompt and efficient processing of all cash receipts and disbursements. To ensure effective internal controls, different members of the staff must be responsible for processing cash receipts, processing cash disbursements, preparing bank reconciliations, and preparing financial statements for review.

In addition, financial policies should specify the types and amount of insurance the association must have to insure its assets and operations. Such insurance should include bonding for staff and volunteers who handle cash and securities as well as directors and officers liability insurance. As part of your board orientation, review the organizational chart to see where the financial operations arc managed. Then request a listing of current insurance policies identified by type of insurance, coverage amount, and expiration dates to ensure that adequate coverage exists.

Reserves and investments

Typically investment and reserve policies and guidelines are also part of an organization's financial policies. As a board, review these policies to determine if they are consistent with current conditions or need to be revised. K no policies exist, now is an opportune time to create policies that fit the organization's goals and objectives.

It is important to clearly understand the difference between investments and reserves.

An investment policy dictates how cash and liquid reserves will be invested. The policy should identify what types of investments the organization can purchase and who approves or authorizes their purchase and sale. An association should review and update investment policies regularly as its needs and market conditions change.

A reserve policy dictates how net assets (reserves or fund balance) will be allocated. Net assets represent the excess of assets over liabilities. Reserve policies vary widely, as they are based on the culture and needs of individual organizations. One association may have a policy that prohibits an excessive buildup of reserves, and another may build up reserves to fund future programs or operating expenses.

As part of your orientation, if applicable, review the investment portfolio allocation to determine whether it complies with the investment policy. If a reserve policy exists, review the reserve balances for the past several years to determine whether your association has been meeting its goals.

Budgeting: A tool to measure results

Developing an annual operating budget is a process that may involve both staff and volunteer leaders, depending on your association's size and scope. Hy clearly spelling out in financial terms the association's goals and activities, an annual operating budget serves as an extremely effective tool for monitoring the results of the association activities.

In addition to the annual operating budget, your association may develop an annual capital budget, which allows it to allocate resources for purchasing equipment or other long-term assets. The association may also maintain cash-flow projection worksheets that allow the staff tu monitor cash balances weekly or monthly.

Financial statements

Financial statements report the association's financial activity and results of operations. All financial statements should be accurate, easy to understand, and produced in a timely, consistent manner.

These statements arc typically prepared internally every month and forwarded to the board or appropriate committee for review monthly or quarterly, according to the association's needs. In addition to the actual numbers, they should include both annual and year-to-date budget numbers so that variances are easy to detect and review. Typically they also include prior-year activity to allow tracking of trends and variances in operations from the previous year.

Financial reports include the following types of documents:

* The statement of financial position (formerly known as the balance sheet) provides you with an understanding of assets and liabilities as of a specific date. It typically provides a good picture of the association's solvency. Review this statement to determine the status of the assets, liabilities, and net assets. Then ask these questions: Is sufficient cash available to support the association's operations? Do current assets exceed current liabilities? Is the organization laden with debt? Does it have a positive fund balance?

* The statement of activities (formerly known as the income statement) provides information about income and expenses for a specific period of time. Review this statement to determine whether revenue goals are being met, if expenses are in line with budget projections, and if the organization is generating an addition to net assets (formerly known as net income).

The statement of activities should include the annual budget and budget-to-date figures to determine whether income and expenses are in line with budget projections. Ask for an explanation of any large variances between the actual year-to-date and budgeted year-to-date figures.

Income and expenses may be reported by natural account or by program area. When financial stateare prepared using natural accounts, expenses are listed by type of expense (such as printing, postage, and salaries).

When statements arc prepared by program area, expenses include indirect costs (such as personnel and overhead) in addition to the direct costs of operating a program. Λ financial statement prepared by program area will list expenses by program (such as the annual convention, education programs, membership, and fundraismg). This type of statement allows organizations to determine net income or loss by program area. Natural account statements, on the other hand, report net income or loss for the organization as a whole.

* The statement of cash flows is prepared by some organizations to provide information regarding increases and decreases in current assets and liabilities as well as increases or decreases in cash balances since the beginning of the fiscal year. This statement identifies how activities to date have affected cash balances.

Your association also may have an independent external auditor or accounting firm conduct an annual audit of financial operations. Even if the bylaws do not require it, an annual audit is highly recommended to ensure the proper reporting and management of financial resources.

Industry trends

Although several high-profile nonprofit accounting improprieties have been reported in the past few years, it was really the increased number of financial scandals in the for-proflt sector that led to the passage of legislation commonly referred to as "Sarbanes-Oxley" in 2002. Currently little of this act applies specifically to nonprofits. However, complying with components of the act will demonstrate high standards of financial accountability to your constituencies. As a board member, you can

* encourage the creation of a finance and or audit committee with at least one financial expert serving on the committee;

* urge adoption of a code of ethics and conflict-of-interest statement for both volunteer leaders and staff to sign;

* have the audit firm provide a report on your internal controls;

* ensure that the audit firm is independent of the association;

* include "whistlehlower" protections that prevent retaliation against stafl members who report wrongdoing;

* include a record-retention policy and a review of transactions that may seem to be "insider" transactions-payments to the organization's officers, directors, or trustees, management, major donors, immediate family members of the preceding, and controlled and affiliated groups.

By asking the right questions and reviewing and monitoring financial results, you will have the information you need to fulfill your fiduciary responsibility in this age of increased accountability. You do not need to become a finance expert to be an effective board member. Hut you must know how to provide the appropriate level of oversight.