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Asking More Commentary: Perspectives from Mendoza College of Business

Commentary Post - Thomas Harvey

How boards can identify the most appropriate financial indicators

April 15, 2013

In our view, boards often get financial information in ways that are not conducive to the oversight process, or to surfacing the questions and concerns that boards need to consider; often they are actually the opposite.

Board members are prone to presenting surface questions, which are masked as rigor, but are just trivial rigor. Who among the readership has not sat through some financial discussion where a board member asks about some small expense to make it seem as if she or he has studied and understands the entire budget. Apart from time wasting and time mal-focusing, the reverse is often true; they have not a clue.

During seminars in which we have been involved, CEOs often complain that trustees overstep their governance role by getting into budget or program detail at an inappropriate level. Our experience indicates that this micro-management actually results from the way materials are prepared for presentation to the board. Budgets should be formatted specifically for the board.

While financial reports for management need great detail so that decisions can be made within a realistic financial context and program staff can be held accountable based on good data, those are often not the numbers the board should look at. Boards should think carefully about the few financial indicators that tell them about the agency’s financial condition. Such indicators that might be candidates, depending on the particular agency are:

  • Money in the bank
  • Debt
  • Accounts payable
  • Accounts receivable

For organizations, indicators such as these are like blood pressure and temperature. Boards should establish healthy levels, and then assure themselves that they are in the normal range. And some of these numbers may well be in the monthly budget. However, budgets are a sea of numbers—and key indicators get lost in the surf.

A second point to keep in mind is the form in which the numbers are presented. Dollars are the usual medium. But, there are a couple of other formats that may interest board members and provide a crisper picture, which can be presented along with dollars. Percentages connect with individuals in terms of the magnitudes of difference. For example, boards should monitor variances between months or a predefined healthy point. For the most part, magnitudes of difference are a crucial indicator, and presenting that will help trustees see where they are.

However, one can also use graphic presentations. Bar graphs, pie charts, and other graphical presentation formats provide a visual picture of numerical relationships. They are rarely used in board fiscal presentations, yet are potentially among the best ways to show numerical relationships.

There are additional considerations. The conventional budget (expenditure categories by month) can be supplemented by functional budgets and performance budgets.

A functional budget replaces the row containing months with agency product lines—foster care, adult counseling, adoption, etc. Here the trustees can see the costs of each product line. One can then ask questions about whether or not the expenditures seem reasonable or the place to be.

The board can also ask for and consider a performance budget—cost per unit of service. What does it actually cost to provide a foster placement? An adoption? A hard-to-place adoption? How does it compare to competitor agencies locally and nationally?

Activity-Based Costing is another tool that looks at per unit costs. Here, special attention is paid to whether the costs of overhead/infrastructure are equal or (more likely unequal) across all product lines. A hard-to-place adoption is likely to cost significantly more than the average one—how much is the question to which trustees should know the answer.

Here is a common example. Many organizations use event-based fundraising approaches—golf outings, etc. They routinely report successful fundraising success at these events, and everyone feels warm and fuzzy. In our experience, these events, in most cases, cost more than they raise when all costs are taken into account, especially staff time.

Most importantly, trustees should always assess the value of a program by its alignment with the organization’s mission. However, as noted in the adage, “No margin, no mission,” trustees must be equally realistic about how viable the program’s funding is. Thus board members must be open to the need for fertilizing programs, or for pruning them. The MacMillan Matrix (see original article) can serve as a valuable tool for carrying out a necessary assessment of the financial viability of programs.

Tough financial times are forcing nonprofits to close or merge. The Alliance for Children and Families has noted trends in nonprofit sustainability and survivability. More rigorous and appropriate financial oversight is certainly something that trustees can undertake to make sure they do the right thing the right way.

Note: This column was excerpted from the "On Board" column published in Issue 1 – 2013 of the Alliance for Children & Families Magazine. The column is written by Thomas J. Harvey, MSW, the director of the Master of Nonprofit Administration Program at the University of Notre Dame Mendoza College of Business; and John Tropman, Ph.D., professor and associate dean for faculty affairs at the University of Michigan School of Social Work.