Financial Responsibilities of Nonprofit Board Members

Serving on a nonprofit board is an honorable and rewarding endeavor, allowing individuals to contribute their time, talent, and treasure to causes they are passionate about. However, it also comes with significant responsibilities, particularly concerning the organization’s financial health and sustainability.

Board members have three basic legal duties that must always be met.

1. Duty of care

To exercise reasonable care when making decisions on behalf of the organization

2. Duty of loyalty

To put the interest of the organization before their own personal and professional interests

3. Duty of obedience

To comply with applicable federal, state and local laws and adhere to bylaws and policies

Board members are also responsible for the financial oversight of the nonprofit, which involves:

Monitoring Financial Statements

Regularly reviewing financial statements to ensure the organization’s financial health.  Financial statements should be reviewed monthly and compared to the budget to determine if the organization is on the right track.  It also helps to compare current results to the previous year and determine reasons for variances.

Budget Approval

Participating in the creation and approval of the annual budget. This ensures that the organization allocates resources effectively to achieve its goals and objectives.  The organization’s staff is responsible for implementing the budget, but the board is responsible for ensuring that the budget is reasonable and in align with the organization’s mission.

Ensuring Adequate Control

Implementing and reviewing internal controls to prevent fraud and ensure accurate financial reporting. This might include overseeing audits to maintain financial integrity.  Even the smallest organization should have controls in place.

Fundraising and Resource Development

While the staff often spearhead fundraising efforts, board members play a crucial role in resource development. Board members should make a personal financial contribution to support the organization and demonstrate their commitment and leadership to the organization.  Board members should also attend fundraising events and leverage their connections to attract donors and sponsors.

Compliance and Legal Responsibilities

Board members must ensure that the nonprofit complies with all legal and regulatory requirements. This involves maintaining accurate financial records, timely filing of IRS filings, grant reporting, and other compliance requirements. The board also needs to stay informed of state and federal laws governing nonprofits and ensuring the organization adheres to these regulations to maintain its tax-exempt status.

Risk Management

Understanding and mitigating financial risks is crucial for the stability of the nonprofit. Board members should participate in a risk assessment of the organization.  This includes recognizing potential financial risks, such as economic downturns, donor dependency, and funding cuts and how the organization will prevent the risks from actually happening.

The financial responsibilities of nonprofit board members are vital to the organization’s success. By exercising diligent oversight, participating in fundraising, ensuring compliance, and managing risks, board members can help steer their nonprofit towards achieving its mission while maintaining financial health and integrity. Serving on a nonprofit board is not only an opportunity to make a positive impact but also a commitment to upholding the highest standards of financial stewardship.