Reading the warning signs:

Knowing when your group's finances may be ailing

It is your job as a board member to ensure that the organisation your board is overseeing remains financially healthy, so it is of vital importance that you remain vigilant to any situations that may spell trouble.

Below we have listed some warning signs or indications that may help you to recognise when your board may be heading towards financial difficulties. By no means do any of these situations mean there is a problem, rather they indicate circumstances in which questions should be asked.

• Any deviation from the budget approved by the board at the start of the financial year
  Changes to the budget can mean a change to the organisation's bottom line – and if this is the case, you need to know about it. However, bear in mind that a budget is really no more than a plan, and things don't always go exactly to plan. You need to make sure you are receiving regular updates on how the organisation is performing in relation to the budget so you can keep on top of problems if and when they crop up.

• An unexpected reduction in revenue in comparison with previous years
  Unexpected is the operative word here. Reductions in revenue are not of themselves a reason to be alarmed; income streams are often lumpy. However, being aware of fluctuations (particularly if they are not anticipated in the budget) will ensure you can be one step ahead of any potential problems and take steps to overcome them.

• An unexpected increase in costs in comparison with previous years
  This could include a telephone bill that is usually $100 a month that suddenly jumps to $500, or a wages bill that suddenly becomes much more expensive than usual. Again, it is the unexpected nature of the increase that should set the alarm bells ringing, rather than the increase itself.

• The incurring of any unusual and unexpected but significant expenses
  A large cost that appears out of the blue can throw a budget right out of whack. When this happens it is important to confirm that the expense is a one-off and that it can be covered.

• A failure to obtain independent valuation of major assets
  The key feature of this statement is the word "independent". Changes in the value of any assets that come under your board's responsibilities need to be assessed "at arm's length" by a third party before any changes are made to the accounts.

• Significant variation in the amount of liability (or debt) in comparison with previous predictions
  Spiralling debts are often the first sign of ill-health. If the organisation is spending too much, it's vital to get to the bottom of the problem sooner rather than later.

• A reduction in the value of net assets
  Net assets are the value of total assets minus total liabilities. Any change in the net assets, therefore, indicates a change in the organisation's value.

• Poor performing fundraising activities
  If fundraising activities are not bringing in the expected revenue, it may be time to start pulling in belts or thinking about other alternatives.

• A lack of clarity as to the source of funds
  It is wise to know exactly where your organisation's funds are coming from as there may be conflict of interest, legal or ethical considerations to take into account.

• Late reports
  Late reporting is often an indication of deceptive behaviour, misleading practices – deliberate or otherwise – or an attempt to avoid accountability. Even at its most benign, late reporting still constitutes a failure of duties and may prevent you from detecting a problem early enough to fix it. It is therefore vitally important that the cause of the delay is uncovered immediately and that processes are put in place to prevent it happening again.

• Vague answers to questions regarding financial capacity
  Board members are duty-bound to ask questions and continue asking them until they are completely satisfied with the answers. If you are being put off by the person responsible for safeguarding your organisation's financial health, you would be foolhardy if you did not find out why.

Refer to the Board responsibilities help sheets for more information about your financial responsibilities.