Guest Post – By Barry Baker, Partner, GrantThornton NZ
In my line of work, I have come to realise most people feel more comfortable and confident talking about illness and medical conditions than they do about finance and accounting matters. I also know that my chosen profession has a poor track record of providing 95% of the general public (who are not accounting tragics) the tools to help them understand and use financial information to make decisions.
In the Not for Profit space, this can mean all finance and accounting responsibilities often fall on the Treasurer, without much input from organisations’ Board members. This is a problematic trend given:
- all Board members have duties to make good financial decisions – not just the Treasurer
- Boards function best when there is diversity of thought – not just the perspective of one
- often, what traditional “finance” people want to contribute to a Board is wider than their
The ultimate goal is to give all governance teams enough information so they can each use their unique perspectives to identify risks before they become disasters and make decisions to mitigate these.
So, with all this in mind, I would recommend four critical areas you can focus on for your board – induction, reports, asking the right questions and being aware of any red flags.
When a new member joins the Board, it’s helpful to provide them up with a short guide with FAQs tailored to the organisation. This guide could include:
- the main risks to the organisation
- the responsibilities of the Board in relation to finance matters
- how the reports work
- questions a Board member could ask.
Traditional financial reports are confusing and can lack context or leave a reader thinking: “So
I generally recommend providing only two or three key reports, each using colour coding or traffic lights to highlight the good, the bad and the ugly. Reports should also include simple explanations for differences in expected results – not on a separate page or Board paper.
It’s also useful for each column in every report to have an explanation for what that column is, and where the information comes from. You can also include sample questions readers might like to ask.
It’s also important to not include too much detail that will obscure the important insights.
The Board should be able to read these few reports and get the gist of what has happened, what they think will happen and why.
Traffic light report
This report compares the actual year to date results with the budget for the same period; each line has a traffic light graphic – green for “all good”, yellow for “needs attention” and red for “danger, danger – action required!”
Each line also has a short explanation for why the actual results are different from the budget – for example, “Spent more on travel than expected” or “Project has been delayed”.
This means Board members can focus on the items that really matter and can consider if the
explanation provided actually makes sense.
Often when we start a Board role, we don’t know what questions to ask about the finances. Some example questions include:
- What caused the difference in actual results to the budget? Will it happen again?
- We seem to be doing really well so far this year – is this permanent or will we incur some costs later than expected?
- Are people taking their holidays? (Leave liabilities are one of the largest liabilities that NFPs often have on their balance sheet)
- I am concerned that we are well behind budget, what actions are in place to help turn this around?
- I am sorry, I do not follow you/understand this number – please step me through it.
- Your explanation does not make sense to me, could you describe it in a different way?
- I don’t understand these numbers, how is our cash now and by year end?
While not a pleasant thought, sometimes the person providing your financial information may not be doing a great job. Some red flags could be:
- Lots of jargon
- The accountant or finance person gets snippy or defensive when you ask questions
- Finance reports are constantly late to the Board
- Saying all variances to budgets are “timing differences”
- Saying “it’s too hard to explain”; if your finance person cannot explain something to your
satisfaction – it’s their failure, not the Board’s
Red flags can sometimes point to fraud or other wrongdoing but more often, they could simply mean your finance person needs some help to produce more useful information for the Board.
In summary, feeling confident with finances is a skill that can be learned by anyone.
Bring your fellow Board and Committee members into the financial fold by presenting them with simple reports that highlight risk areas. If they don’t feel confident asking questions or understand the reports, encourage them to talk to the Board Chair about how they can get more support.
Other areas that are useful include a governance (Board) dashboard, understanding Grant or
projection accounting, and the basics of risk management. Additionally, as the governance team becomes more experienced, they can start to ask some of the harder questions like, “We have deficits – is that OK?” and “I’m worried we’re going broke – now what?”