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
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
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
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
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.
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