Governance Guru: How can I build my confidence about finances when I'm scared of numbers?

I'll let you in on a secret about overseeing NFP finances. You don't have to be an accountant, or even good at maths, to uphold your duties in this area. You just need to be financially literate enough to interpret certain information and ask the right questions so you can understand what the numbers mean for the organisation’s operations.

First, let’s demystify financial jargon

You’ll need to be familiar with the meaning of these key terms:

Budget – an estimation of how much the organisation will receive (its income) and spend (its expenses) over a period of time (usually 12 months). The board needs to approve the budget before presenting it to members (if appropriate) for their approval.

Actuals – the income that was actually received and the expenses that were actually incurred, as opposed to the amounts that were estimated (budgeted).

Deficit or loss –when an organisation’s expenses are higher than its income, the result is a deficit. It’s the same as a loss.

Surplus or profit –when an organisation’s income is higher than its expenses, the result is a surplus. It’s the same as a profit.

Profit versus not-for-profit– the for-purpose or charitable sector is often called the “not-for-profit” sector, but this doesn't mean an organisation can't make a profit or isn’t allowed to make a profit. It does mean that any profits must be invested back into the organisation and must not be shared with individuals, such as board members.

Profit and loss statement – this is a summary of an organisation’s income and expenses over a period of time. As a board member, you’ll regularly be asked to look at profit and loss statements along with various other financial reports.

Cash flow – the movement of cash in and out of an organisation. For many organisations, this is different from income and expenses, because often income and expenses are recorded when they are due, not when they are received or paid. So, you may have a surplus recorded because you have income due, but if you haven’t actually received that income, you may not have enough cash in hand to pay bills that are due.

Variance – usually refers to a budget variance, meaning that the income actually received or the expenses actually incurred are different from the amounts budgeted..

Depreciation – this refers to the amount by which an asset loses value over time.

Net assets – this is the amount left when an organisation’s liabilities (what it owes to others) are subtracted from its assets (what is owned by or owed to the organisation). Net assets are also known as equity.

Retained earnings/equity – accumulated surpluses (profits) that the organisation has saved over time rather than invested back into the organisation. These are often known as reserves.

Revenue – another word for income, or money the organisation receives.

Expenditure – another word for expenses, or money the organisation spends.

Some boards use different terms to refer to the items above. If you're not sure what somebody is talkin about, ask.

Check out our online glossary of financial terms to learn more financial lingo.

Don’t be afraid to ask questions

Even board members with accounting and financial backgrounds rely on their peers to help them interpret what the numbers are saying. Questions from the broader committee are essential for healthy decision making and effective financial oversight.

Remember that 90 per cent of the time, the question you ask will also be on the minds of other board members, so you are doing everyone a favour by speaking up.

When you’re reviewing financial reports, start by asking yourself these key questions to check your understanding:

Is the organisation going broke?

To answer this, look at the balance sheet (or income statement) and check the net assets figure. Is it positive? That's a good sign. If it's negative, you'll want to raise this with the treasurer ASAP. It’s also important to keep an eye on the profit and loss statement and make sure you’re tracking close to budget.

Can we pay our bills?

It’s important that the organisation has enough money in the bank to pay its short term debts (bills and other liabilities). The easiest way to check is to divide the current assets by the current liabilities (found on the balance sheet), and this number will give you an idea. For example, if the number is 1.5, then for every dollar the organisation owes, it has $1.50 to pay for it. Keep in mind that current assets may include money owed to the organisation that hasn’t been paid yet (accounts receivable), or term deposits that are not readily accessible. To get a really accurate figure of what you have to work with, look at the cash in bank figure.

How dependent is the organisation on any one funding source?

If the organisation gets over 50 per cent of its funding from one source, such as a grant or major donor, it’s important to consider contingency plans: what if that funding source does not continue? This question should form the basis of a funding strategy to ensure that the organisation isn’t over-reliant on unsustainable funding and that the board is considering a diversity of income sources or options for downsizing operations.

Do the figures show significant trends, or significant variations on last year’s figures, or previous years’ figures?

Are fixed expenses, such as insurance and utilities, increasing at a faster rate than usual? Are debtors (people who owe the organisation money) late in paying or not paying? Have regular income sources increased or decreased?

Are we using our funds appropriately and for their intended purpose?

Does the board have an understanding of the budget implications of any funding agreements, contracts, MOUs etc in place? Are these contractual obligations being fulfilled? It may be worth asking what specific line items mean so you know which expenses align with which income sources. Or it may be useful to ask for the information on the budget and profit and loss statements to be separated into project or funding categories so it’s clear which expenses are associated with which income.

These questions will help you to translate numbers on a spreadsheet into a story about your organisation and how well it’s faring financially.

Look beyond the numbers to what’s happening on the ground

Financial reports don’t exist in a vacuum – they tell the story of your organisation’s work. The key is to connect the figures with what’s happening on the ground. Ask yourself:

• How do these numbers reflect our strategic priorities?
• Are our major programs or services financially sustainable?
• Do we have the resources to grow or invest in new initiatives?
• Are we allocating enough to governance, staffing and infrastructure?

If your organisation runs a training program, what are the associated costs? If it has received a new grant, is it showing up in the income report? If service demand has grown, are staffing and operating costs increasing accordingly? If staff leave is an increasing liability, what might this say about workload sustainability?

By linking dollars to activities and impacts, you help to ensure that finances are aligned with operations and strategy.

Understand your role

You are not on the board to be a bookkeeper or to be a financial expert. You are there to provide your perspective and your understanding, and sometimes, it’s the people who have the least experience who are best equipped to generate new ideas or uncover hidden problems.

Take the time to familiarise yourself with the financial reports at each meeting and feel free to ask the treasurer or another board member for support. Build your confidence by asking simple questions first, and consider further training (Community Directors has some excellent options here.

The more consistently you review the finance reports, ask questions (even to yourself) about the numbers and consider their implications for operations and strategy, the more confident you will feel about your role in ensuring the financial stability and success of your organisation.