Making sense of the money; what you must understand about your association's finances.

Like corporate boards, association boards assume a fiduciary responsibility to safeguard the assets of the organization. That means you must become thoroughly acquainted with how to fulfill your responsibility to your association's members in the following five areas.

Fiscal policies

Your board should adopt and review the association's fiscal policies annually. Make sure fiscal policies cover

* significant accounting policies and internal controls;

* authority for conducting transactions, including signatories, and authority for making bank transfers, opening bank accounts, or approving investing or lending transactions;

* the association's reserve requirements (the level of net assets maintained to provide for future contingencies);

* investment policies, including permitted investment vehicles, duration, risk tolerance, and performance criteria; and

* bonding or other significant insurance requirements for the association, volunteers, and staff.

Related questions to ask:

* Does the association have a strong internal control system to reduce the risk of fraud and financial misstatement?

* Are financial reserves adequate to provide for business downturns or investment in new programs, and is the purpose for which reserves would be used clear?

* Are investment policies consistent with the intended purpose of the funds as well as the association's philosophy?

* Is insurance coverage adequate to minimize risks to the association?

Budgets

The board should approve annual budgets, which may include operating budgets, capital requirements, and cash projections. When reviewing budgets, make certain that such budgets

* ensure that financial resources will be available to fund programs and services;

* support the association's strategic goals;

* safeguard financial health by taking a long-term perspective;

* provide management with guidelines, not fixed appropriations; and

* make optimum use of the association's resources.

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Related questions to ask:

* Does the budget provide sufficient detail to direct resources consistently with the association's strategic mission, yet give management enough flexibility to exercise appropriate discretion?

* Are multiple-year budget projections included to provide perspective on long-term financial objectives?

* Do projections point to any future problems the association should be addressing?

Financial reports

You should receive

* a balance sheet showing assets, liabilities, and net assets (i.e., assets minus liabilities or reserves);

* a statement of activities that details revenue and expenses for the month and year to date;

* a statement of cash flow, detailing cash received and paid out;

* performance versus budget statements (typically in the statement of activities), with explanations for significant variances;

* comparative financial statements for the prior year;

* financial reports broken out by business segment (program or department);

* year-end projections;

* a statement of cash or investment position and cash requirements; and

* underlying performance data (as described in the subsection "Performance Measures," which follows).

Related questions to ask:

* Has the staff leadership sufficiently explained significant variances?

* Are explanations consistent with underlying performance information and reported nonfinancial business results?

* Have operating cash requirements been sufficiently addressed?

* Do projections or trends versus budget and the prior year indicate any business problems that should be addressed?

* Do explanations address the performance of specific business segments, and do any of these segments require board action or attention?

* Is the association investing excess funds appropriately for long-term and short-term monies?

Along with the financial report, you'll often get a written report from management that includes a narrative summary of financial results for the period and an analysis of what the results indicate for the association in the near future. How often your board receives financial reports and how much time you spend reviewing them during board meetings may vary, depending upon whether your finance committee conducts a detailed review on a more frequent basis (see subsection, "Monitoring").

Some boards with active finance committees relegate the financial report, along with other items such as minutes, to a consent agenda. Do not let this prevent you from raising questions about items that may require board attention or that you find unclear.

Performance measures

The following information about underlying performance measures is helpful to know:

* Information on quantities sold or members served versus targets in prior years.

* Results of fundraising initiatives.

* Actual contributions versus targets in prior periods.

* Recruitment and retention statistics.

* Program attendance and cancellation rates.

* The number of requests processed and calls received.

* Success of marketing initiatives.

Related questions to ask:

* Do the measures reflect the association's critical success factors?

* Are trends in performance measures adequately explained?

* Do trends in performance measures draw attention to any areas of organizational performance that may require board attention?

* Are similar statistics available for peer associations to provide bench-marking comparisons?

Every association should identify its own factors to measure its success in meeting strategic objectives. Once your association has identified these success factors, measurement and reporting across time will provide your board with meaningful information about performance. You may also want to use surveys and ratio analysis to compare your organization's performance results to those of other associations in your peer group.

Monitoring

Association boards often use finance and audit committees to monitor financial progress. (Small nonprofit organizations may combine the two committees.) Finance committee responsibilities may include

* reviewing financial reports in greater detail and with greater frequency than the full board;

* conducting detailed budget reviews and presenting recommendations to the board;

* recommending fiscal and investment policies to the board;

* meeting with investment managers to review investment selection and performance;

* conducting selection processes for banking, lending, and investing relationships;

* reviewing cash projections and cash planning;

* reviewing longer-term financial projections and revenue and expense requirements;

* planning for financial contingencies;

* monitoring compliance with regulatory requirements, including tax filings; and

* reviewing the adequacy of insurance coverage.

Audit committee responsibilities may include

* selecting an auditor;

* meeting with the outside auditor to discuss audit planning and to receive the report on the audit results; and

* reviewing the auditor's management recommendations and working with staff on implementing the recommended changes.

Audit committee members should meet with the auditor annually, without staff or management present, to ensure that the auditor has an opportunity to speak candidly.

These five areas are the foundation of your association's financial structure. Even if you are new to both your association's board and the world of finance, understanding them will help you contribute to sound fiscal oversight for your association and the members it serves.

Laura A. Hay is vice president for finance and technical services, Ohio Society of Certified Public Accountants, Dublin. E-mail: [e-mail].