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Increasing Your Board's Financial Literacy

by Molly O'Connell

Financial literacy is one of those buzz terms that many nonprofits use when prospecting for board members. The goal is usually to find nonprofit board members who can read financial reports without breaking a sweat and adopt budgets that will serve nonprofits well. But as we head into 2012, is it enough to focus on just the numbers?

In this challenging environment, being aware of sector wide trends is also a skill that boards need. Specifically, understanding what impacts a nonprofit’s cash flow and taking a critical look at a variety of scenarios, including shifts in a nonprofit’s traditional revenues sources, or even the possibility that a nonprofit may merge, is important.

A recent study, Financial Literacy and Knowledge in the Nonprofit Sector, suggests that a broader definition of “financial literacy” is needed. The report from the Center on Philanthropy at Indiana University exposes that board members are least likely to have a command of scenario planning, or the ability to analyze a potential merger, or debt restructuring, and that almost one third of those surveyed describe themselves as “novices” in understanding trends in the nonprofit sector (as opposed to either “knowledgeable” or “expert.”) Also, not surprising but still alarming, among the 500 nonprofit CEOs, CFOs and board members surveyed, those from smaller organizations (under $1 million) were less likely to be able to answer three basic questions about economics, and among those same small organizations, operating reserves are dangerously low: 45% reported less than 3 months of operating reserves and 28% reported less than the optimal 4-6 months in reserve. These findings collectively underscore the concern that in the current economic environment the boards of the smallest nonprofits (the majority of the sector) are not well positioned to avoid and survive a cash flow crisis or a shift in the nonprofit’s usual income streams.

The report also observes:

  • * Board orientations typically include sharing a copy of the ethics or conflict of interest policy, but less commonly the financial risk management policies (such as those addressing internal controls).
  • * Boards typically review a budget that shows the variance between actual income/expenses and the budgeted amounts, but they are less commonly engaged in scenario planning that takes into account future potential outcomes affecting cash flow; and
  • * While the majority (66%) of the nonprofits responded that their boards were “involved in financial accountability” only 26% reported that those same boards were actively engaged in fundraising for the nonprofit.

There is no question that we need board and staff members to be able to recognize sector trends and how those trends impact their organizations. We also need board members to be financially accountable for oversight of financial risk management policies, and to be able to read the narrative created by income/expense reports. As your organization plans its next orientation for new board members, look for ways to share resources that will help your board be ready to meet the challenges ahead.

10 Resources to Increase the Financial Literacy of Board and Staff:

Finally, being aware of trends that impact a nonprofit’s financial resources is an important component of financial literacy: Board members need to know what’s happening in the broader nonprofit environment, particularly in their state, so they can understand the implications for their particular nonprofit. Help your board members stay abreast of trends that impact nonprofits by introducing them to free e-newsletters, such as the newsletter of your State Association of nonprofits (MANP!), Nonprofit Quarterly’s Nonprofit Newswire, Guidestar, and the National Council of Nonprofit’s e-newsletters.

Looking ahead, what are your nonprofit’s biggest challenges for 2012? Please let us know so we can stay on top of the trends that will help your organization navigate the challenges ahead.

This article reprinted with permission from Nonprofit Knowledge Matters, a publication of the National Council of Nonprofits.

For additional resources on Financial Management from MANP, check out:

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Internal Control Basics for small businesses and organizations

Specific steps to take to fraud-proof your business or organization:

The most pressing issue for a small business or organization is lack of resources. Money is tight, and you don’t have enough hours in the day to take care of everything there is to do. That should not mean you let down your guard and allow internal control weaknesses to threaten your business or organization.

The number one internal control to pay attention to is segregation of duties. That means that no one person has control over all aspects of a transaction. Primarily, this pertains to the financial aspects of the business, but it can also mean that you have a second set of eyes to check key transactions such as taking an order, double checking the quantity, address, price, shipping address, credit card information, inventory stock, etc.

First of all, to err is human. EVERYONE makes mistakes. Your goal should be to design a process where mistakes are minimized. Split up the work. Rotate staff. You not only get improved segregation of duties internal controls, you get cross training, and the opportunity to provide a more interesting work environment for your staff.

At every bank, officers and tellers are REQUIRED to take at least 2 consecutive weeks of vacation every year. The primary reason is so any fraud that has been occurring can have a chance of coming to light when the perpetrator is not there to cover his/her tracks. One huge red flag of fraud for any business is the uber-dedicated employee who is never sick and never takes a day off. Just on the face of those facts, I would bet $100 every time ……that the person is covering up some manner of fraud. Occasionally, I’d lose the bet. But more often, I would win.

So……..your business or organization only has resources for one bookkeeper. What can you do? Let’s think…….

At the very minimum, you MUST have the bank statements sent directly from the bank to someone OTHER THAN THE BOOKKEEPER! They should be sent to the President/owner/Executive Director. Or their spouse. Or to the Treasurer. Or to your accountant. Find somebody!

The key to this control is that the person who receives the bank statements has to OPEN THEM and LOOK AT THEM! If I had a nickel for every business that has the statements sent to the owner, who then has no time for them and just hands them, unopened, to the bookkeeper, I’d be typing this from my cabana in the Bahamas.

Look at the cancelled checks.

Look at the signatures.

Look at the vendors.

Look for direct debits.

Look for bank fees.

Look at the deposits.

Checklist for examining the monthly bank statement:

Look at the cancelled checks.

Are there missing check numbers?

At the beginning of the month, you should see the outstanding checks from the prior month clearing. There may be some irregularity in the numbers.

At the end of the month, there should be some irregularity in the numbers because of outstanding checks.

Do you print your checks on a printer? Are there any handwritten checks? That would be unusual.

Look at the signatures.

In many small business fraud cases, the bookkeeper forges one or more signatures on regular and payroll checks. Try this test. Go ahead and sign any check as “Mighty Mouse.” See if the bank processes it. I bet they do.

Look at the vendors.

In many fraud cases, the bookkeeper sets up a phony vendor and then issues checks to her phony vendor business. Make sure you recognize every vendor name. I have yet to meet a small business owner who could not spot a phony vendor name. But you have to LOOK.

Look for direct debits.

Many frauds involve the bookkeeper making wire transfers or other direct debit transactions. Make sure any you see look reasonable and familiar.

Look for bank fees.

Often a fraud will involve an unusual transaction and will trigger an unusual bank fee. Also, fraud will also cause the bank balance to be dangerously low, triggering insufficient funds charges. A dishonest bookkeeper will try to cover those up in the accounting records.

Look at the deposits.

Do you make deposits every day? Are they all there? Do the amounts look right? Is the total for the month what you expect?

After a few months, this cursory kind of review ought to take only a few minutes – about 10 minutes a month. Isn’t that pretty inexpensive insurance against financial fraud?

How does that all sound so far? Think you’re done? Think you’re covered? Well, have you got any credit card accounts? Well……DO YOU?

At the very minimum, you MUST have the credit card statements sent directly from the bank to someone OTHER THAN THE BOOKKEEPER! The drill is similar for credit card statements.

Look at the vendors and amounts.

Look for bank fees – late charges and over-limit fees. Any foreign currency transactions?

Look at the payments.

The person reviewing the credit card activity every month should recognize, to some extent, every transaction and fee. If there is anything that is not familiar, ASK QUESTIONS. The simple fact that someone other than the bookkeeper has a regular and direct interest in and access to the financial transactions is enough, in my opinion, to deter at least 80% of fraud and embezzlement.

I have only a few final words. There are many other important internal controls covering many other aspects of any business. Consider inventory controls, accounts receivable controls, payroll controls, cash receipts and cashier controls, and on and on. However, if you have to start somewhere, and are looking for the most cost effective controls, I believe these I’ve described today are them. Plus……

At least once a year, order a credit report on your own business. In some frauds, the thief opens loans in the business’s name, or other accounts, and absconds with the proceeds. A credit report is one place you may catch these.

Run a criminal background check on your bookkeeper. Just do it. Wait… the bookkeeper a family member? Let me tell you the story of a client who owned a convenience store. Her sister was an employee. What a good sister she was, too. She was always amazingly generous with presents at Christmas and birthdays. Oh…..guess where the money was coming from. Yes, she was stealing from her sister’s convenience store.

Run a credit report on your bookkeeper. If they balk or refuse, consider hiring a new bookkeeper and make the credit check part of the job requirements. See the sister story above!

If you are a board member, run a credit check and criminal background check on your Executive Director. Just do it.

If I had small business clients, and if they agreed to adopt these controls, I would provide a guarantee that I would refund the prior 12 months of accounting and tax preparation fees if the business was ever a victim of fraud by the bookkeeper. I am not kidding.

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