Good governance is essential for the financial wellbeing of your not-for-profit organisation.
In this article we cover some of the key financial aspects of governance with a focus on the not for profit sector. At the end of each section we pose a question you may wish to consider and discuss with your board.
Good governance starts with an understanding of why your not-for-profit organisation exists. It should be easy for an organisation to explain what its purpose is or why it has been mandated to do what it does. This then leads onto identifying what goals need to be achieved to ensure the organisation is meeting its purpose for existence.
Once a not-for-profit organisation understands why it exists then the organisation needs to consider its strategy so that it can understand key risks, the impact of those risks and how to mitigate or manage those risks should they eventuate. A good strategy will ensure that the organisation is able to understand what needs to be done to achieve its overarching purpose, as well as ensuring that those charged with governance are able to understand the information placed in front of them.
The founding document of the organisation (such as a Constitution or Trust Deed for example) should be the cornerstone for setting strategic direction. This document sets out the intent of why the organisation exists and its structure. We recommend that all board members/trustees be familiar with the founding document and refer to it regularly.
Is your strategy clearly understood by all board members? And the whole organisation?
The annual plan sets out the goals for the year ahead in order for the organisation to meet or continue toward its strategy. An annual plan document can take a number of formats. We recommend distilling the overview of the plan onto one page if possible (depending on size and complexity) so that it can easily be shared with and understood by stakeholders.
An important financial link is between the annual plan and the annual budget. We have seen many cases of an organisation preparing a brilliant annual plan and a well-crafted budget in complete isolation. The annual plan and budget should be prepared in conjunction with each other – the plan informs the budget of what activities need to be undertaken and once these are costed into the budget they made need to be revised or adapted to live within the means of the organisation. Once the two documents have been drafted in tandem, the organisation is in a strong position to achieve their goals, knowing the budget supports the planned activities.
Can your annual plan be summarised in a one page format and easily articulated?
The annual budget should be signed off by the governing body prior to the start of the new financial year. Once the budget is approved it is not generally modified, however we recommend that a reforecast exercise is carried out mid-year and possibly at the end of the third quarter. The purpose of the reforecast exercise is to provide the board with an indication of what the expected full year result will be, compared to budget.
Preparing a three way budget (Profit and Loss, Balance Sheet, and Cashflow) provides you with a complete view of the organisation’s financial health. Many entities only prepare a Profit and Loss budget which does not provide information about funding new or replacement assets, meeting debt repayment obligations, or forecasting cashflow. Tools such as Futrli (link) and Spotlight (link) which are Xero add-ons allow for easy three way budgeting.
Does your annual budget take account of annual plan priorities and capital expenditure requirements?
Annual Performance Report / Financial Statements
In recent years there has been significant changes, to the way not for profit organisations, and in particular registered charities, prepare their annual performance reports or financial statements.
For Registered Charities, the annual performance reports and financial statements need to conform to the reporting standards written by the External Reporting Board (link: XRB). The reporting standards are organised into tiers based on the organisation’s annual expenses and whether there is any public accountability.
Possibly one of the biggest changes was the introduction of a statement of service performance which was initially required for those charities reporting under tier 3 and 4 but will be mandatory of all registered charities from 1 January 2021.
A registered charity is required to submit a copy of the annual performance report / financial statements along with their annual return to Charities Services (link) and this financial information may be subject to audit or review depending on the type of organisation or its internal policies.
Our website has free resources for not for profit entities including model financial statements and summarised accounting standards which are designed to help you gain a high-level overview of financial reporting requirements. Discussing with your auditor and accountant how changes to accounting standards may impact your annual financial statements is an important action to take at least annually.
Are you confident that your financial statements comply with applicable accounting standards, and do they tell readers a story of how the organisation performed?
Regular Financial Reporting and Key Performance Indicators (KPIs)
Understanding any change in an organisations financial stability needs to be addressed quickly particularly if there are any areas of concern around funding or expenditure. On the flip side, if an organisation is doing financially better than expected then it may provide scope to advance any projects that assist in the organisation achieving its purpose earlier than expected.
At BDO we recommend that monthly or quarterly management financial reports are prepared and reviewed in a timely manner, along with ensuring that any key performance indicators that are relevant to the organisation are considered as an early indicator of how the financial performance of the organisation is progressing. Two KPI’s are particularly relevant to the NFP sector: 1) Reserves: we have previously written a white paper outlining what makes a good reserves policy, why reserves are important, and how they can be monitored (link) 2) Available cash: an understanding of cashflow is vital especially where an organisation is rich in fixed assets (such as property) but has limited cash to meet its short term commitments.
Do you receive regular and timely financial reporting, including KPI’s that are relevant?
Income streams and funding
Most NFP’s and charities rate their number one issue as funding. Many of them are dependent on external funding from various sources, such as Government contracts, gaming funding, charitable trust funding, donations and other forms of funding.
Board members should have a good understanding of how their organisation is funded and what the key risks are in relation to the various income streams. For example if reliant on one major source of funding, what is the risk that funding could diminish in future? Are there contingency plans in place to seek alternative funding?
Have you carried out an analysis of income and discussed the risks and opportunities this presents?
Policies provide the staff and leadership a framework for carrying out the tasks of running the organisation.
Whenever a policy is developed there should be a review date set on that policy to ensure that it remains relevant. Most policies probably only need to be reviewed every two to three years, but with key policies – such as risk assessment - reviewed on an annual basis. Once the board has developed its set of policies it should put a system in place to monitor these policies, in particular those sensitive policies such as fraud and whistle blowing, policies that are vital and which every board should keep in the forefront of their minds. Good organisations make sure that their policies are alive and that all staff members are made aware of them.
Do you allocate time each board meeting to carry out a policy review?
Boards are faced with a multitude of risks that pose threats to their organisation. These could be internal or external and range from low to high impact. To name just a few: fraud, health and safety compliance, cyber-attack, turnover of key personnel, loss of significant funding.
While some risks can be mitigated others need to be managed and monitored. Implementing a full review of your insurance requirements can help identify gaps in your current cover for those risks that can be mitigated. Creating a risk register listing risks, likelihood, mitigation and contingency plan should be a must do item for all boards. BDO have developed a tool to make this process easy and allow a board to regularly monitor their risk profile – contact us (link) to find out more.
Does your board have a clear understanding of significant risks and are these regularly monitored?
Those that are tasked with governance of an organisation need to understand what they are bringing to an organisation. One of the ways to do this is to identify the current knowledge base of a board and note any areas of weakness. We have provided a Trustee skills matrix to assist with analysing the skills of your board.
Every person joining a board should undertake thorough due diligence of that board and of the organisation before accepting the appointment. The key areas that we recommend for due diligence are: - The constitution of the organisation. - The strategic plan of the organisation. - The minutes of the past year’s meetings. - The published Financial Statements. - A review of current board members and an understanding as to their areas of expertise. We would encourage any prospective board members to attend at least one or two board meetings as an observer before accepting an appointment. It is vital that a person be able to view other people in a working environment to ensure that they are compatible to being able to work with those people.
Succession planning is crucial to ensure continuity and appropriate skills are represented on the board. This process generally involves planning prior to election or resignation dates to identify which members are leaving the board and what mix of skills is required from new members. The process of identifying potential members can take many forms such as advertising publically and approaching personal networks.
Have you recently carried out a skills audit of current board members and planned to address any gaps by succession planning?
Being part of the governance of a not for profit is a fantastic way to give back to your community but it also requires a high level of dedication, responsibility, and an understanding of how to govern effectively.
Lifting the standard of governance across the sector in New Zealand will have far reaching positive effects and BDO is committed to furthering this aim. At BDO we are here to help your not-for-profit organisation to reach its overall goals in order to ensure its purpose and reason for existing are met.
One of the ways we aim to support the not-for-profit sector is by sharing our information and resources with sector participants across New Zealand via our industry specific page.
Contact one of our Not-for-profit advisers today if you would like to discuss any areas that could improve the good governance of your organisation.