Financial Red Flags for Nonprofit Board Members

With the ongoing funding cuts and concerns about a potential economic downturn, it's crucial for nonprofit board members to stay vigilant about their organization's financial health. If your nonprofit's finances are shaky, it could jeopardize its ability to fund essential programs or even continue operating. As a board member, you play a critical role in maintaining the organization's financial stability. Here are some key warning signs to watch for:

Budget Adoption and Implementation

An absence of a budget indicates a lack of fiscal discipline. The board should mandate the creation of a budget and ensure it aligns with board-approved strategies.

Unexplained Financial Variances

Once the budget is approved, the board should regularly compare it to actual results to identify any discrepancies. While some variances are expected, the nonprofit's staff should provide reasonable explanations for them.

Unusual Spending Patterns

Board members need to be cautious of overspending in one program at the expense of another. Dipping into reserves, unplanned borrowing, or raiding the endowment could signal the start of a financially unsustainable cycle.

Inconsistent Financial Statements

Financial statements that are inconsistent or not prepared according to U.S. Generally Accepted Accounting Principles (GAAP) or another accounting basis can lead to poor decision-making. They may also damage the nonprofit's reputation, suggesting lax internal controls, mismanagement, or fraud. The board must ensure that financial statements are properly prepared.

Delayed Financial Reporting

Ideally, board members should receive financial statements within 30 days of the end of a period. Larger organizations should engage external CPAs to conduct annual audits, with the entire board or audit committee selecting the auditing firm.

Stakeholder Concerns

Not all red flags are found in the numbers. If long-time, well-respected donors express doubts about the organization's finances, board members should take these concerns seriously. Additionally, the board should be aware if the development staff is reaching out to major donors outside the usual fundraising cycle.

Executive Director Overreach

An executive director who insists on choosing an auditor or makes strategic or spending decisions without board input may be overstepping their bounds. Such actions could indicate dishonesty or financial instability.

As a board member, it's essential to fulfill your fiduciary responsibilities by identifying and addressing financial warning signs. If you need assistance, we can help review your budget and financial statements and suggest strategies for navigating an uncertain future.