Nonprofit Financial Management: A Board Member Guide

Serving on a nonprofit board is a meaningful commitment, and one of the most important responsibilities that comes with it is financial oversight. Board members have a fiduciary duty to ensure that the organization uses its resources wisely and in accordance with its mission. Yet many board members come from non-financial backgrounds and feel uncertain about how to fulfill this responsibility effectively.

Understanding Fiduciary Duty

As a nonprofit board member, your fiduciary responsibility has three components: the duty of care (making informed decisions and paying attention to organizational affairs), the duty of loyalty (putting the organization's interests above personal interests), and the duty of obedience (ensuring the organization adheres to its mission, bylaws, and applicable laws). Financial oversight sits at the intersection of all three duties.

You do not need to be an accountant to fulfill these responsibilities. You do need to understand the basics of nonprofit financial statements, ask the right questions, and ensure that proper financial controls and processes are in place.

The Key Nonprofit Financial Statements

Nonprofit financial statements differ from for-profit statements in important ways. The Statement of Financial Position (equivalent to a balance sheet) shows your organization's assets, liabilities, and net assets. Net assets are classified into two categories under current accounting standards: net assets without donor restrictions (formerly called unrestricted) and net assets with donor restrictions (formerly called temporarily and permanently restricted).

The Statement of Activities (equivalent to an income statement) shows revenue and expenses for the period. Pay close attention to whether the organization is running a surplus or deficit, how actual results compare to the budget, and whether revenue sources are diversified or overly dependent on a single funder.

The Statement of Functional Expenses breaks down spending into three categories: program services, management and general (administrative), and fundraising. Donors and watchdog organizations often scrutinize these ratios. While there is no universal standard, most well-run nonprofits spend 65% to 85% of their budget on program services.

The Statement of Cash Flows shows how cash moves in and out of the organization. Even a nonprofit with a budget surplus can face cash flow problems if grants are reimbursement-based and there are delays between spending money and receiving reimbursement.

Fund Accounting Basics

Nonprofits use fund accounting to track how money is used according to donor restrictions. When a donor gives $50,000 to be used specifically for your after-school program, that money cannot be redirected to cover rent or salaries for a different program. Fund accounting ensures that restricted dollars are tracked separately and spent only for their designated purpose.

As a board member, you should regularly review a report showing the status of restricted funds: the original award amount, expenditures to date, and the remaining balance. Misuse of restricted funds is one of the most serious compliance violations a nonprofit can commit and can result in having to return grant money or losing tax-exempt status.

Budget Oversight

The annual budget is a critical governance document. The board should approve the budget before the start of each fiscal year and receive regular budget-to-actual comparison reports, ideally monthly or quarterly. When reviewing these reports, look for line items where actual spending significantly exceeds the budget (overspending) or where revenue is falling short of projections.

Ask your executive director or finance staff to explain significant variances. A 5% variance may be normal operating fluctuation, but a 20% variance in a major category warrants explanation and possibly corrective action. The budget should be a living document that the board revises when circumstances change significantly.

Internal Controls Every Board Should Ensure

Internal controls are the policies and procedures that protect against fraud, errors, and mismanagement. As a board member, ensure that your organization has separation of duties (no single person should be able to authorize, record, and reconcile transactions), a formal approval process for expenditures above a set threshold, regular bank reconciliations performed by someone other than the person writing checks, and an annual independent audit or review by a CPA firm.

The board should also have a conflict of interest policy, a whistleblower policy, and a document retention policy. These are not just best practices; they are required questions on the IRS Form 990.

Reading the Form 990

The IRS Form 990 is a public document that nonprofits file annually. It discloses executive compensation, board member names, financial results, program descriptions, and governance policies. As a board member, you should review the Form 990 before it is filed. Pay special attention to the compensation section (Part VII), the governance section (Part VI), and the financial summary (Part I). The entire board should approve the 990 as part of their oversight responsibility.

Questions Board Members Should Ask

At every board meeting that includes financial review, consider asking: Are we on track with the budget, and if not, what is the plan to address shortfalls? What is our current cash position, and do we have enough runway to cover the next three to six months of operations? Are all restricted funds being used in compliance with donor requirements? Are there any outstanding compliance issues, IRS notices, or audit findings? What financial risks are we facing, and what is management doing to mitigate them?

Building Financial Literacy

If you are new to nonprofit finance, consider attending a board financial literacy training offered by your state nonprofit association, the Nonprofit Finance Fund, or BoardSource. Many CPA firms that specialize in nonprofits also offer board training sessions. Investing a few hours in understanding financial statements and nonprofit accounting fundamentals will make you a significantly more effective board member.