Fiduciary Magazine

Archive for August, 2009

No matter how many people I speak with or stories of success I hear, the true health of an organization can only be assessed through their financials. Like reading a mystery novel, the story comes to light slowly, and sometimes surprisingly, as things aren’t always as they seem. Some people look at budgets like diets, something to strive for as opposed to a practical plan to follow. So are budgets myths developed to tell donors and board members what they want to hear? While that is surely overstating the situation in most cases, enough for-profit and public companies have had trouble due to the myths of their budgeting processes that it is a worthwhile question to ask in the non profit sector as well.

When assessing an organization, there are multiple financials to read: Audits, Quickbooks files, Budgets, etc.. Each of them will tell a slightly different story because each is looking at the organization from a different point of view. Usually budgets are very accurate and I have developed great faith in them as compasses that can inform me about the direction an organization is heading. They are like a strategy document in numbers.

There are telltale signs that proper due diligence was done in the budget preparation and that it honestly states the outlook for the coming year. I worked with someone years ago who wouldn’t approve a budget with any round numbers in it. Perhaps that sounds a bit strict, but he believed that round numbers meant we hadn’t done the math because bills don’t come in nice round numbers. Real bills usually end in one and three and six but rarely zero. So now if I’m looking at a budget with all round numbers I too worry that there’s way too much guesswork on the page and not enough reality.

Also, when I’m looking at the projected budget for the coming year, I like to see the Variance to Budget statement from the year before. This will tell me how budgets and fundraising have been done in the past. Have they always budgeted in round numbers? Were they accurate? Looking at the previous year’s budget will give an accurate frame of reference for their fundraising goals. For example, a new budget may say that they anticipate raising two hundred thousand dollars online. But if they only raised two thousand dollars last year online, then it’s a red flag. Numbers that jump without good cause may mean that the budget is more fantasy than reality.

It’s easy to make a fantasy budget that says everything will cost less this year and donors will give more. Reality budgets however will always have something in them that will give you pause. Reality is like that. I expect explanations for how they arrived at these numbers in the form of a detailed spreadsheet which includes a brief sentence for each line item that varies from the year before.

Budgets rarely vary wildly, and if the one you are looking at does, it needs to accompany a written document that spells out why. To be sure, staff is not alone in shifting budgets around. Often a board will demand that numbers ‘match’. I won’t speculate on why, except to say we all like to think that money in and money out should be the same. But lying on a budget is like lying on a diet. You can say what you want on paper but if you’re eating cupcakes for breakfast every day and not exercising, you’re going to get fat. Try to be realistic. If you aren’t, then you’re doing a disservice to yourself and to the organization.

Budgets are a great place to begin a conversation, but they are not the entirety of what needs to be said. Budgets can accurately point to where too much money is being spent and where not enough is being raised. A true assessment can lead to changes in governance and fundraising and ultimately strengthen the organization, allowing more funds to flow through to the mission, which is the ultimate goal. In my opinion, budgets are myths that encode the heart of the organization within their numbers.

Sitting on a board of directors is like building any new relationship. Even if your friends and business partners admire the organization, you must ask questions and dig in to learn about it for yourself. Remember, the more you know, reallyknow, about an organization, the more confidence and respect you will have for the way it is operating. That respect and confidence will lead to more funds and the ability to fundraise because you will not just be depending upon hearsay, you will fall in love with it on its own merit.

In order to govern responsibly you must understand all facets of the organization. The fastest and most accurate vision of a charity is through their finances.  Never assume that everything must be ‘right’ with the organization just because of who else is sitting in the boardroom. Fiscal excellence is the responsibility of the entire board and cannot be assumed. You must bring the same diligence and care to the fiscal oversight in your charity work that you bring to your corporate work.

Here are three rules of thumb to build confidence and trust in your organization.

1. Get copies of the tax returns and financial audits from previous years. These should be downloadable from the internet and if they’re not, suggest that they should be.

2. Study the budgets for the current and previous year.

3. Read the bylaws and their accounting manual.

Fiscal responsibility and transparency are a key component to good governance. With these three basic steps you will learn where the organization has come from and where it stands today. Since you’ve asked for these documents and have reviewed them, you will be able to discuss any questions or irregularities with the ED/CEO and that person will think of you as someone who is not only financially literate, but interested. You will be in the small circle of people that they will seek out if and when trouble starts to brew and that’s exactly where you want to be. Through this conversation  you are building trust, first with the organization and then in turn with the community.