Five Tips for Non-Profit Boards to Build Financial Literacy

How to make “money moves” a priority

Have you ever been in a meeting, and when it comes time to talk numbers, the other person looks like a deer in headlights? He or she shuffles papers, looks anywhere but at you, and tries to change the subject. You wonder how it could be—this person is the director of a non-profit organization. There is no doubt he or she is unprepared, but the unpreparedness may have a foundation not in idleness, but in financial illiteracy.

According to Investopedia.com, “financial literacy” is the “ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.” Financial literacy is crucial for yourself and your family, small business owners, and any person with some capacity to have control over financials.  

 Financial Literacy and Non-Profits

This is arguably even more crucial for non-profits. Healthy finances and cash flows are at the very foundation of a non-profit and its ability to carry its mission forward. Unfortunately, over the past several years, financial scandals regarding fiscal mismanagement have become far too common, increasing the scrutiny placed on the non-profit sector. And while many of these cases dealt with fraud and clear issues of mismanaging funds, not all of them did. Others were simply based on regrettable financial mistakes due to a lack of knowledge.

Financial literacy should be increased not only at the board level but also at the staff level. Nonprofit boards must have (and fully understand) up-to-date financials in order to make informed decisions for the future of the organization. They have large donations coming in from fundraising or grants, large expenditures going out, and budgets, financial reports, and audits in between. But not every board member has the in-depth knowledge required, or even vague familiarity (in some instances), with financials.

Additionally, non-profit staff are the ones making the day-to-day decisions that may affect the organization’s financial viability. They are on the “frontlines” meeting potential donors, making decisions about vendor services, and developing a budget for grant proposals. They may not know it yet, but what they need is education, knowledge, and transparency.

Ultimately, the responsibility of building financial literacy rests with the Executive Directors, CFOs, or even the board members themselves. As fiduciaries of the non-profit, board members have the obligation to ensure that internal controls are in place to secure the use of the organization’s assets. And one of the best ways to do so is to build financial literacy throughout the organization.

Five Tips to Help Build Financial Literacy

1.  Practice transparency. This does not imply that every piece of financial information should be shared with every staff member, but it does mean that there should be a certain level of openness when it comes to financials. For instance, review IRS Form 990 annually. Explain the meaning of the income statement and balance sheet to help build an understanding of the financial condition of the organization. Use a financial “dashboard” or cash flow template for a snapshot of the financial health and trends of the organization, and to break down the metrics into easier-to-digest charts and tables.
2. Provide learning opportunities. Few of the board and staff members will feel comfortable with the financials being shared, so give them opportunities to learn and gain fiscal confidence. You could invite a guest speaker (local CPA or other accounting professional) to one of your meetings, encourage questions (even anonymously) to better understand the numbers, or recommend basic accounting books or online courses. Providing these learning opportunities in the ordinary course of business will not only help develop financial literacy among your team, but it will also enable them to make decisions with finances at the forefront of their minds, rather than a fleeting thought about it, if at all.
3. Use functional financial statements. Functional financial statements allow the team to understand how each program generates revenue and incurs expenses. Both board and staff members support the organization’s mission, the efforts of which are generally most visible throughout its programs. With a functional structure, there can be more strategic discussions centered around the performance of programs, directly tied to the revenue they generate and the expenses they incur. Essentially, it helps define the connection between how money comes in and why it goes out to measure the success of a certain project.
4. Work on contingency planning. As an organization, develop various fundraising and grant scenarios and account for different variables. Then, make informed management decisions based on those different scenarios and determine how the budget would be affected in each. This is a valuable exercise to determine which scenarios are most beneficial to the bottom line and to the organization.
5. Engage staff in budgeting. Everyone is busy, of course. But the more you can lead your team into understanding the organization’s budget, the more their financial literacy will increase. Budgeting is much more than a list of numbers on a document. Understanding how those numbers got there and why is the true key to unlocking financial mastery. With this knowledge, the team will have the ability to make more informed strategic decisions in their day-to-day activities.

Every non-profit board member should prioritize financial literacy in their continuing education—throughout the year. Through guidance and leadership, board and staff members alike will be empowered with the knowledge they need to meaningfully contribute to the organization’s financial health.

For more information about increasing financial literacy in your organization, please contact us at [email protected]. Until next time, keep Building Your BADASSERY.