Your Board May Be Looking at the Wrong Numbers

Every month, or at least every quarter, nonprofit boards receive financial statements. There’s the statement of financial position, the statement of activities, a budget-to-actual report, and sometimes a cash flow statement. The board reviews the numbers, asks a few questions, discusses the variances, and then moves on to the next item on the agenda.

But here’s a question worth asking:  Are those really the numbers your board needs to understand how the organization is doing?

Financial statements matter. They provide important information about the financial position and results of the organization. Board members need to understand them. But financial statements primarily tell us what happened financially. They don’t necessarily tell us whether the organization is accomplishing its mission.

And those are two very different questions.

 A Surplus Doesn’t Tell the Whole Story

Imagine your nonprofit finishes the year with a $300,000 increase in net assets. At first glance, that sounds like good news.  But what if most of that increase came from a restricted contribution that can’t be used for general operations? What if the organization had a surplus because it didn’t fill several staff positions? What if programs were reduced because of staffing shortages? What if the organization raised significantly more money but served fewer people?

The financial statements may accurately report a positive financial result. But the board still needs to understand what happened beyond the bottom line.  The organization may have had a good financial year. That doesn’t necessarily mean it had a good mission year.  And that’s where nonprofit boards need to think differently about the information they’re receiving.

 Financial Health Is More Than the Bank Balance

A board may be told that the organization has $1 million in the bank. That’s certainly useful information.

But how much of that money is actually available for general operations? How much is restricted? How many months of expenses could the organization cover if revenue suddenly declined? Is the organization becoming increasingly dependent on one government contract, one grant, or a small number of donors?

Those questions provide much more insight into financial sustainability than a bank balance by itself.

The same is true when looking at the statement of activities. Knowing that revenue increased by 10% is interesting. Knowing why it increased is much more useful. Was it because of sustainable operating revenue? A one-time grant? A capital campaign? An unusually successful fundraiser?

The number matters.  But the story behind the number matters more.

 What About the Mission?

This is where nonprofit boards sometimes miss an opportunity.  There is a lot of time talking about financial performance, but how much time is spent connecting those financial results to mission performance?

If a nonprofit’s purpose is to provide services to 5,000 people a year, the board should probably know how many people were actually served.

If the organization exists to help people achieve a particular outcome, the board should know whether that outcome is being achieved.

If demand for services is increasing, the board should understand whether the organization has the financial and staffing capacity to respond.

And if the organization is spending more money on a program, the board should be able to discuss whether the additional resources are producing additional impact.

This doesn’t mean everything needs to be reduced to a single metric or that nonprofits should treat their mission like a business profit calculation. It means boards should have enough information to  connect resources, activities and results.  After all, isn’t that what stewardship is really about?

 The Right Numbers Depend on the Question

One reason there isn’t a universal “nonprofit board dashboard” is that every organization is different.  The information a board needs should depend on what the organization is trying to accomplish and what decisions it is facing.

If the organization is considering opening a new program, the board needs to understand the expected costs, funding, staffing requirements and anticipated impact.

If a major grant is ending, the board needs to understand how dependent the organization has become on that funding and what replacing it would require.

If the organization is struggling to recruit employees, the board probably needs more information than simply seeing that personnel costs are under budget.

And if demand for services has increased dramatically, the board needs to understand whether the organization has the capacity to meet that demand without putting its financial sustainability at risk.

The information should follow the decision. Instead of asking, “What reports do we normally put in the board packet?”, perhaps we should be asking, “What does the board need to know to make good decisions right now?” That’s a very different approach.

 The Financial Statements Still Matter

This doesn’t mean boards should stop reviewing financial statements.  Boards need to understand them. They need to understand the organization’s financial position, operating results, cash flow, restrictions, budget and significant variances. But financial statements should be the foundation of the conversation, not necessarily the entire conversation. Financial statements tell the board something important about the organization. But they shouldn’t necessarily be the only thing the board is looking at.

 Maybe the Better Question Is…

Rather than asking whether your board receives enough financial information, ask whether the board receives the right information.

Can your board tell whether the organization is financially sustainable?

Can it tell whether programs are reaching the people they are intended to serve?

Can it see where the organization is becoming financially or operationally vulnerable?

Can it understand whether the organization has the people and resources necessary to accomplish its mission?

And perhaps most importantly, can the board connect the organization’s resources to the impact those resources are intended to create?  Because the purpose of nonprofit financial information isn’t simply to tell the board whether the organization made or lost money.  It’s to help the board be a better steward of the resources entrusted to the organization.

Your board may not need more numbers.  It may just need different ones.