ywca board guide to financial vitality

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1 YWCA USA Resource Library ywca board guide to financial vitality A guide for understanding, planning, tracking, and acting to strengthen the YWCA s financial vitality DNA. Introduction: YWCA Financial Vitality - The DNA 2 Understanding Board Members Fiscal Responsibilities 3 The YWCA Mission and Financial Planning the Critical Connection 4 YWCA Long term Financial Planning 5 Understanding the Board s Fundraising Role 6 The YWCA Fundraising and Donor Development Committee 7 Supporting the Work of the YWCA Finance Committee 8 Mission-Focused Budgets 8-9 Course Changes Based on the State of Financial Indicators 9 a. Cash Flow Report 10 b. Budget Status Presentation 10 c. Balance Sheet Report 11 d. Ratios Report 11 Legal, Funder, Vendor, and Affiliation Obligations 12 Contracts and Other Agreements with a Financial Component 12 Policies and Procedures to Ensure Adequate Controls and to Protect, Manage, and Grow Assets 12 Receipt and Review of Audit and IRS Filings 13 Summary 13 Bibliography 14 YWCA Board Guide to Financial Vitality 1 This document is part of the YWCA USA Online Resource Library. Find more resources on the intranet at

2 ywca board guide to financial vitality Board member roles, responsibilities and commitments essential to ensuring strong financial DNA and sound organizational finances include: Understanding board members fiscal responsibilities Understanding the organization s relevance, impact, goals and financial needs Developing and implementing long-term financial plans Carrying out the board s fundraising roles Supporting a strong finance committee which prepares recommendations for: o Mission focused budgets Operational Elements o Course changes if necessary based on the state of financial indicators o Ensuring that legal, funder, vendor, and affiliation obligations are met o Policies and procedures to ensure adequate controls and protect, manage, and grow assets o Audit and IRS filings o Contracts or other agreements with a financial component Sustainability Elements A strong, pervasive financial corporate culture with solid expertise, systems and practices that support: Financial vitality as a visible priority of the board and staff Mission-focused and comprehensive financial planning Astute financial and asset management Timely and accurate analysis and reporting Accountability A strong reputation, and a strong business model: Mission implementation is clearly articulated, inclusive and effective CEO and board leadership is analytical, nimble, and financially astute The YWCA is an effective partner and collaborator and is known for broad based community engagement Services are high-impact and move the dial Programs are operated efficiently and the YWCA is seen as a leader in the field There is a healthy mix of subsidized and self-supporting programs The budget benefits from multiple income streams. Robust resource development: Substantial donor base that spans the income spectrum Effective donor cultivation and stewardship Annual fund program Major gifts program Planned giving and bequests program Funding and sector advocacy program Links to additional resources and tools appear throughout Tip: this overview can be included in board members orientation notebooks YWCA Board Guide to Financial Vitality 2

3 Understanding Board Members Fiscal Responsibilities The YWCA board serves as custodian of the organization s assets and is responsible for liabilities incurred. The board is also responsible for tending to the organization s two bottom lines so both show positive results: The charitable purpose bottom line = lives changed for the better The financial bottom line = net assets/fund balance Nonprofit board members are trustees of the organization s assets and therefore must act in good faith and exercise due diligence while vital services are being provided and as it carries out its financial responsibilities. These roles require board members to: Stay informed and active Stay objective, responsible, honest, and focused on the good of the organization as a whole Act as stewards of the public trust Exercise reasonable care in all decisions and avoid placing the organization at unnecessary risk. Bibliography 1 Not every board member can be a financial wizard. Every board member, however, needs to be a financial inquisitor. It is essential to understand basic terminology, be able to read financial statements and judge their soundness, and have the capacity to recognize warning signs that might indicate a change in the overall health of the organization. If a board member does not understand something, she must be willing to find out the answer. Essential for board members to see on an ongoing basis: That financial plans are consistent with the YWCA mission and strategic plan That projected income and cash flow are adequate to meet organizational goals How financial activity compares with what was budgeted and whether action is needed That expense levels are appropriate That organizational reserves are protected and sufficient to weather unforeseen events What fundraising each board member is responsible for What checks and balances are in place to ensure accuracy and prevent errors, fraud, and abuse That legal, funder, vendor and affiliation obligations are being met Bibliography 2 Time out for accountability Nonprofits operate in a fishbowl - If funders or key stakeholders lose faith in a YWCA s ability to control and account for finances and/or make a definable impact, faith is lost in the whole organization. The organization must fulfill its exempt purpose while managing its financial resources wisely. Most activities are open to scrutiny by any and all, e.g: the IRS Form 990 must be accessible to those requesting it. The organization needs to have stringent rules about excessive personnel compensation or unreported benefits and a formal conflict of interest policy that every board member signs. The organization s expenses for administration and fundraising as compared to program expenses need to be obviously reasonable, which usually means less than 20% of the total. YWCA Board Guide to Financial Vitality 3

4 The charitable purpose bottom line = lives changed for the better $ The financial bottom line = net assets The YWCA Mission and Financial Planning a Critical Connection The overall health of any nonprofit depends on keeping the organization s mission and assets in balance, both as individual areas of concern and, on a larger scale, their relation to one another. They are intimately related, each depend on the other, and exist together within a system of value exchange. Without keeping this critical element in mind from the beginning well thought out goals, strategies, and objectives easily become irrelevant. The consideration of organizational initiatives in terms of both mission outcome and a carefully developed financial sustainability forecast is essential as a good idea that reaps great rewards initially can easily turn into a bad idea with long-term consequences. Investment in a short-sighted, we will build it and they will come project is likely to seriously threaten the financial stability of an organization. Bibliography 3 There are two types of financial planning, one guides service delivery and operations for the short term and one helps ensure financial sustainability over the long term. Both types start with enthusiastic support by board and staff members for the YWCA mission, major service areas and for the organization s planned strategies. An organization s mission is its We are... statement, a statement that lays out its purpose, overall direction and the major thrusts of its work. Organizational strategies are its We must... statements, statements that identify key issues to address and service, operations and capacity building priorities. Bibliography 4 Short term financial planning usually takes the form of an annual budget, developed from the organization s one-year goals and well documented unit cost and unit income predictions. Financial sustainability planning involves an in depth process rooted in the organization s mission and historical and likely future scenarios in the areas of service delivery costs, operational costs, income generation, planned initiatives and expansions, and facility upkeep and/or expansion considerations. From this information how much money and the type of funds that will be needed are determined, objectives set, possibilities identified, strategies developed, the plan implemented, and monitoring and evaluation processes set. Many points from the 2012 YWCA USA Financial Vitality Study are in included in this overview. For the full report, see the YWCA Financial Vitality Taskforce Report. YWCA Board Guide to Financial Vitality 4

5 Mission Impact Mission Capital YWCA Capacity YWCA Long term Financial Planning Bibliography 5 Funds needed to provide services and make progress on our mission rarely fall in a YWCA s lap. A long term financial sustainability plan identifies the resources that will be necessary over the course of the next 3-5 years, steps to secure needed resources, and overall, grow the ability to seize opportunities and navigate unexpected threats while maintaining general operations. Long term financial planning is usually led by the finance committee and includes: Full understanding of the organization s mission and must dos: A financial plan outlines how the organization expects to reach its critical aims from a financial perspective. In developing the appropriate road map, the YWCA mission and services and the operational processes essential to staying fully aligned serve as the plan s core. A well-thought-out and comprehensive plan is one of the keys to financial stability and growth, both essential elements to fulfillment of the YWCA mission. Assessment of current efforts and aims for the future: Adapted from Boston Consulting Group's Growth-Share Matrix, this tool helps YWCA leaders analyze YWCA programs and events and their suitability for continuation. Each major YWCA effort is placed in the quadrant of the chart that most closely matches its YWCA mission contribution along with a symbol showing the level of its contribution to the YWCA s financial sustainability. Once the chart is populated, recommendations to consider emerge as follows: -Heart: High Mission Impact but Low Sustainability. The suggested course of action for efforts in this quadrant is to keep them but build their financial sustainability. -Star: High Mission Impact and High Sustainability: The suggested course of action for efforts in this quadrant is to keep and strengthen them. -Attention: Low Sustainability and Low Mission Impact: These are candidates for closure or transfer. -Purse: High Sustainability but Low Mission Impact: The suggested course of action for efforts in this quadrant is to keep them and increase their mission impact $ Sustainability Bibliography 6 For Matrix instructions, see the Dual Bottom Line Matrix Map Tool in the Resource Library s Financial Sustainability section. YWCA Board Guide to Financial Vitality 5

6 Understanding the Board s Fundraising Role Strong nonprofit boards not only determine key strategies to meet the organization s mission but also actively participate in fundraising activities required to ensure ample capacity to meet set goals. Board members serve two primary fundraising functions: helping the organization reach and secure new donors and indicating the organization s value to the community to pave the way for a wide range of successful solicitations. This critical part of board membership includes understanding the organization s financial vitality plans, why board level and external fundraising needs to take place, and how the funds raised will advance the mission. Important to note among YWCA board members: Giving and solicitation activities signify a public commitment to the organization s work. 100% board participation is essential for courting other donors Personal giving responsibilities: YWCA fundraising plans include directors making personal and stretch financial contributions each year. They set an important example by showing their commitment to the mission and organization. Annual and major gift responsibilities: Fundraising responsibilities of YWCA boards also include cultivating and directly soliciting potential and current donors. Nonprofit board members use their position and connections in the community and corporate arenas to locate individuals and companies interested in and able to support the organization as well as making cold calls. Special event responsibilities: Many YWCAs have annual events to raise funds and through which current and potential donors become more familiar with the organization. Board members help so that each event is as financially successful as possible, including ticket and table sales, promotion, and securing contributions for supplies, door prizes, and printing services. A Motivator The YWCA Monthly Impact Report: This brief report, presented at each board meeting, outlines a few compelling achievements made as a result of the YWCA s work since the last report, brings the YWCA s mission to life, and informs and inspires YWCA fundraisers. The report should relay documented improvements vs. numbers served. YWCA Board Guide to Financial Vitality 6

7 The YWCA Fundraising and Donor Development Committee An organization s fundraising plans stem from its short and long range strategic and financial plans. As the recent study conducted by the Nonprofit Research Collaborative shows that organizations with strategically aligned fundraising and donor development committees were more likely to meet their fundraising goals establishing and supporting such a committee is highly recommended. Bibliography 7 The job of the YWCA Fundraising and Donor Development Committee is not to wish the executive director luck with her plan. Instead, it is this group that has charge of, with the executive director/ceo s guidance, recommending to the board overall fundraising plans, accountabilities and support, strategies to effectively take the organization s story public, prospect identification processes, board member assignments and training, tracking progress on plans, evaluating results on an ongoing basis, and following up with peers as often as necessary. The Committee also helps board members identify contribution levels to be requested and develops trainings and donor meeting materials that cover the YWCA mission and service impacts. Having a group of peers give undivided attention to one of the organization s funding cornerstones and motivating others to solicit contributions on a colleague to colleague basis ensures greater results. For a Fundraising and Donor Development Committee Job Description, see the Fundraising Committee Job Description sample in the Resource Library s Fundraising and Fund Development section. YWCA Board Guide to Financial Vitality 7

8 Supporting the Work of the YWCA Finance Committee As the YWCA s financial health is worthy of focused attention in the organizational structure, the Finance Committee (often called the Finance and Sustainability Committee) is a standing committee of the board, usually chaired by the Association s treasurer. The treasurer guides the Finance Committee s work to develop recommendations for board consideration in the following areas: Recommendations Presented by the Finance Committee Mission focused budgets Course changes based on the state of financial indicators Legal, funder, vendor and affiliation obligations Policies and procedures to ensure adequate controls and to protect, manage, and grow assets Receipt and review of audit and IRS filings and reports Contracts or other agreements with a financial component Usual Frequency Annually and for new initiatives As needed Monthly or as needed Annual review with additions or modifications made as needed Annually As needed The Finance Committee also fosters an organization s adaptive capacity its nimbleness and its willingness to test new ideas and make course corrections in the face of obstacles and/or new information. For YWCA Treasurer and Finance and Sustainability Committee sample job descriptions, see the YWCA Treasurer and Finance Committee Guide in this section of the Resource Library. About Mission-Focused Budgets Three types of budgets are generated by nonprofit organizations to guide: o Annual operations o New initiatives o Sustainability, which includes capital budgets The purpose of any budget is to show the funds needed to meet mission-focused priorities, the income that will likely be available and how resources will be allocated. Once approved, budgets create the framework for program management and administrative decisions. Creating a budget occurs one step at a time. In summary, the budgeting process includes: BOARD IDENTIFIES: Overall missionfocused objectives STAFF DEVELOPS: Operating plan requirements, Unit costs and unit Income estimates, Cash flow forecast, Assumptions and preliminary budget. FINANCE COMMITEE & TREASURER PREPARE: Budget presentation for the board BOARD APPROVES: Budget(s), fundraising plans,* and the executive compensation plan * If the budget assumes special event or contribution revenue, solid commitments from board members need to be secured as part of the budget approval process. More budget building resources are included in the Resource Library s Short Term Budgeting and Initiatives Planning section YWCA Board Guide to Financial Vitality 8

9 Once a budget is approved, roles are: STAFF IMPLEMENTS, MONITORS, REPORTS, and SUGGESTS STRATEGIES: as need be re: approved budget, plans, and ongoing status FINANCE COMMITTEE, with STAFF, DETERMINES: Recommendations for board consideration FINANCE COMMITEE & TREASURER PREPARE: Presentation of recommendations for the board as needed BOARD APPROVES: Recommendations designed to ensure ongoing financial vitality Bibliography 9 About Course Changes, Based on the State of Financial Indicators At each YWCA Finance Committee meeting the following data is presented and discussed, followed by the development of recommendations to be presented for board action as need be. a. Cash Flow Report b. Budget Status Reports c. Balance Sheet Report d. Ratio Report A summary of each report follows. An Overview and Financial Statements Guide is included in the Resource Library s Financial Reporting and Accountability section. YWCA Board Guide to Financial Vitality 9

10 a. The Annual Cash Flow Report shows anticipated income, expenses, and checking account balance for each month in the coming year. Then, monthly reports are prepared to show actual income, expenses and the checking account balance for the period just passed, anticipated income and expenses for the current period, and whether there has been and will be enough cash on hand to cover anticipated expenses. If there is not, a borrowing plan will need to be developed and activated, e.g. temporary allocation of reserves, investment income, or establishing a line of credit with a bank. A summary based on the following information is presented to the board along with the budget status report and any necessary recommendations. Prior Month Anticipated Cash on Hand at Start of Month Actual Cash on Hand at Start of Month Anticipated Income for the Month Actual Income for the Month Anticipated Expenses for the Month Actual Expenses for Month Anticipated Cash on Hand at End of Month Actual Cash on Hand at End of Month Jan $56,000 $34,500 $18,500 $17,200 $15,500 $20,500 $59,000 $31,200 Current Month Anticipated Cash on Hand at Start of Month Anticipated Income for the Month Anticipated Expenses for the Month Anticipated Cash on Hand at End of Month Feb. $31,200 $21,500 $21,500 $31,200 Variances, Explanations, Action Recommendations To be presented by treasurer Variances and Explanations, Action Recommendations To be presented by treasurer b. The Budget Status Presentation outlines how actual income and expenses for the period (usually a month) and to date compare with expected and approved levels. Cause and effect analyses of this and the cash flow report are closely linked. Usually the page presented to the board presents the total for all programs and departments, with specific program or department figures referenced in explanations presented. If the YWCA board meets quarterly instead of monthly, the column headings figures should match that period. In all cases, the finance committee should receive and discuss these reports and analyses at least monthly. A common monthly budget presentation format is: Income/Expense Category and Description Actual for the Month Amount Budgeted for the Month Actual Year to Date Amount Budgeted Year to Date Salaries $ 54,000 $ 56,500 $150,500 $145,000 Variances and Explanations To be presented by treasurer Action Recommendation To be presented by treasurer YWCA Board Guide to Financial Vitality 10

11 c. The Balance Sheet Report shows what the organization owns, what it owes, and what changes there have been in the overall fund balance over time. Assets: what an organization owns that has value Current assets are cash or other assets on hand or to be received and which could be converted to cash within one year. $ Fixed assets are what the organization owns but does not expect to convert to cash within one year, e.g. buildings and/or property $ Total Assets: $ Liabilities: what the organization owes to others Current liabilities are obligations that will likely be paid off within the year $ Long-term liabilities are obligations due more than one year away $ Total Liabilities $ Net Assets (also known as Fund Balance or Members Equity): what would be left if all assets were sold and all liabilities were paid. Net assets include unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets $ d. Ratios Report Financial ratios are widely-used tools for analyzing the current financial health of an organization, its performance, how its financial health is trending and its potential for sustainability. The most common ratios used in nonprofit finance reports are: For a nonprofit financial ratios primer and sample calculation worksheets, go to: Nonprofit Finance Fund Ratio Primer Ratio Purpose Benchmark Quick Shows net worth At least 1 Current Measures how easily the organization can meet its short term financial obligations At least 125% Days Cash Calculates the number of days the organization can operate in the event that most At least 90 days operating income ceases. Discretionary Income Measures independence from restricted income and contracts Unrestricted gifts are at least 10% of total raised Debt to Equity Shows how easily the organization can meet its long term financial obligations Less than 1 Net Margin Measures profitability At least 2% Government Dependency Measures total government funding as a percent of total revenue Less than 50% Net Assets and Total Expense Measures net assets as percent of total expense 50%+ Capital Intensity Shows how much of total assets buildings and equipment represent Less than 75% Self-Sufficiency Measures non-government income as a percent of expenses 50%+ Community Support Shows what part of total revenue is from fundraising 10%-30%, based on budget size Administration Shows administrative costs as a percent of total expenses 10-20% Fundraising Costs Shows fundraising costs as a percent of total expenses 5-10% Reserves Measures the overall financial status of the organization Unrestricted net assets are at least 12% of total assets YWCA Board Guide to Financial Vitality 11

12 About Legal, Funder, Vendor and Affiliation Obligations A monthly compliance report documents that funds are being managed in accordance with the organization s policies, that the organization s legal requirements are being met, (e.g. withholding/unemployment taxes, workers comp, retirement fund, and YWCA USA support payments) and that required reports are being filed on time. The executive director/ceo provides this documentation to the finance committee. For staff members, see the Operations and Grant Compliance Checklist and the Financial Management Dashboard in the Financial Reporting and Accountability section. About Contracts and Other Agreements with a Financial Component Typically YWCAs have several active contracts, most of which have a significant financial component. When a contract is required or desired, YWCA executive staff, often with the finance committee, identify the scope and specifications for the work to be performed or product to be purchased, issue a request for bids, and thoroughly check responses for completeness and clarity. Assuming there is at least one vendor that exudes a high level of confidence and acceptable terms, a recommendation is prepared for the board of directors. Once a contract is signed it gets executed, compliance is monitored, and amendments and/or renewal made as appropriate. About Policies and Procedures to Ensure Adequate Controls and to Protect, Manage, and Grow Assets Organizational fiscal policies and procedures serve to: -Sustain an integrated accounting system and procedures to ensure safe custody of the organization s financial assets and accurate representation of the organization's current fiscal status. -Guide financial analysis, planning, and savings/investment processes to ensure short and long term fiscal strength and the protection and growth of the organization's assets. -Clarify the roles, authority, and responsibilities for essential financial management activities and decisions. Usual sections for the manual are: Roles and Responsibilities, Ethics and Conflict of Interest Policies YWCA Mission and Financial Considerations the Critical Balance Revenue Generation and Gift Acceptance Policies/Donated Stock Disposition Policies Accounting Functions, Recordkeeping, Banking and Purchasing Procedures and Controls Internet use and IT security Insurance requirements and reviews Contract and Lease Policies Budget Planning Processes Financial Analysis and Planning Audit Processes, Record Retention Asset Protection and Investment Policies For a sample set of YWCA fiscal policies and procedures, see sample Financial Policies and Procedures in the Finance Management section. For sample risk management and insurance processes, go to the Asset Management section. YWCA Board Guide to Financial Vitality 12

13 About the Receipt and Review of Audit and IRS Filings An important role of the finance committee and the board is to secure services for, receive and understand the annual financial audit and IRS filings and take any action needed to ensure full compliance with Generally Accepted Accounting Procedures (GAAP). The audit is the process by which a certified public accountant forms an opinion as to whether the organization s financial statements fairly reflect its financial position. Important to note: the external auditor is accountable to the board, not to management. The audit process also verifies that the YWCA s filing requirements and tax obligations are being met. Most YWCAs are required to have a CPA-prepared audit. Although the audit process is designed to determine that account balances are fairly stated and that the organization includes all required disclosures in its financial statements it does not guarantee that the financial statements are perfectly accurate, nor does it ensure the competence, wisdom, or honesty of management and/or any volunteers serving in fiscally-related positions. Hence, strict adherence to effective tracking, security and reporting systems is essential. With the delivery of the audit will come an auditor s opinion. Types of auditor s opinions include: -Unqualified (clean) the highest level of assurance. -Qualified (auditor has reservations) these will be stated. -Adverse/negative financial statements are felt to be misleading. This is an alert to the board that strong and immediate corrective action is required. -Disclaimer (auditor is unable to form an opinion) the cause of the disclaimer needs to be investigated -Management letter (reportable conditions) this should be distributed to the entire board. A board-approved correction plan will be needed and compliance documented. Bibliography 9 A sample Auditor Selection Guide and RFP are included in the Financial Reporting and Accountability section. Summary High functioning YWCA boards provide strategic and financial guidance that ensure the organization's integrity, progress on the mission, and, ongoing vitality. They understand that the organization's success is their responsibility and that their role includes planning and leadership to achieve the organization's greater potential as well as its mission. To these ends the YWCA board ensures that plans and results are studied through a fiscal lens in partnership with the mission lens, that accurate and current data is available to ensure the lens clear focus, and that determinations regarding overall and long term sustainability are a regular part of the leadership function. Bibliography 10, 11 YWCA Board Guide to Financial Vitality 13

14 Bibliography 1 Adapted from BoardSource and reprinted with permission from BoardSource is the premier resource for practical information, tools, and training for board members and chief executives of nonprofit organizations worldwide. For more information about BoardSource, visit or call BoardSource Content may not be reproduced or used for any purpose other than that which is specifically requested without written permission from BoardSource. Article available go to: Financial Responsibilities of Board Members 2. Adapted from The Financial Responsibilities of Nonprofit Boards; Andrew Lang. Article available go to: Fiduciary Responsibilities of Board Members BoardSource copyright applies as above. 3. An Introduction to Nonprofit Capitalization: Nonprofit Finance Fund Article available go to: An Introduction to Nonprofit Capitalization 4. Strategic statement tips: Community Tool Box: Article available - go to: Community Tool Box 5. Enterprise Platform: Nonprofit Finance Fund Article available go to: Enterprise Platform 6 Growth-Share Matrix: Boston Consulting Group For Citing: Growth-Share Matrix For a How to : About the Dual Bottom Line Planning Matrix 7. Fundraising Responsibilities of Nonprofit Boards: Article available go to: Fundraising Responsibilities of Nonprofit Boards 8. Engaging Board Members in Fundraising: A Nonprofit Research Collaborative Survey Document available go to: Engaging Board Members in Fundraising 9. A Financial Primer Just For YWCA Board Presidents: Sue Otway; past president, YWCA of Carlisle and Diane Glenwright:; Executive Director, YWCA North Central Pennsylvania 10 The Value of Strategic Financial Leadership: Nonprofit Assistance Fund Blog posting available go to: Value of Strategic Financial Leadership 11 Fiscal Health & Sustainability: The Philadelphia Foundation Article available go to: Fiscal Health & Sustainability Updated summer, 2013 Please note: This information is presented as a resource, not as advice, in this format is for YWCA use only, and copyright restrictions apply. YWCA Board Guide to Financial Vitality 14