"Numbers by themselves don't mean anything. It's how they relate to other numbers -- last year, year-to-date and budget -- that's what's interesting." So says the director of finance for an educational organization. "One of the most important things a chief financial officer does is provide good information for making good decisions."
To that, the current board chair and former treasurer of the board adds, "Treasurers and boards have the responsibility to consider the format of [the financial] information being delivered. They must be cognizant of the fact that this information is essential to make good governance decisions."
Which boils down to presentation: not too much information, but not too little, and make it clear.
For the organization to be well run, board members of all backgrounds must be able to understand the numbers. "We want the insight of educators with regard to financials," the board chair says. "As chair, I command it: Silent voice, what do you think? This can't be the voice of the folks with financial acumen only."
Clarity is achieved by thoroughness, questioning, planning and formatting.
Striking the balance
Too much information encourages micro-managing, the director of finance says. Line items on the budget should be condensed into categories, she says, a task to be undertaken with the full knowledge of the board's finance committee ... and with the understanding that the details are available anytime they are needed.
"As a board treasurer, if you want to open a finance drawer, you can do it," the director of finance says. "The accounts have to be open to scrutiny."
But, beware: Over-simplification is not good either. Board members must have confidence that any problems will be apparent to them, since they are the ones held accountable.
The board chair agrees. "The work is so hard, we can't get it done by micromanaging," he says.
"If you give the board information that is too granular, someone will focus on a very minor point," the director of finance says. But, again, she stresses that the information must be good. "If I was not given good information, I would step in and micromanage because I'd be afraid no one else was doing it. Unless the board is provided with credible information, it will have to dig into details."
"Credible" means more than just columns that add up. As she has learned from experience, prompt acknowledgement of mistakes is critical. She cited an example in which a line of credit had to be accessed some weeks earlier than planned. She immediately notified the treasurer, explained the error and received approval for the transaction.
"Later, he told me that [acknowledging the error] had given me such credibility!" she says. "Say what you will do to fix [the error] and don't sit on it. No board wants to be surprised."
Clarity is achieved both by showing relationships among numbers and by explaining deviations. For example, the "Budget vs. Actual" report includes columns for the dollar amount and percentage deviations from, among other things, the year-to-date budget.
Comments, such as "Grant has been denied," explain a lower-than-expected income or "Switch in telephone systems has eliminated monthly service costs," explain lower expenses.
"It's not enough to show budget and actual figures," the director of finance says. "The board needs to know why."
It's the "why" that makes the numbers understandable to everyone. "We assume that not everyone knows how to read a balance sheet," the director of finance explains. "We explain it. I want them to understand this stuff."
Add a Cash Flow Report, which shows week-by-week income and expenses, and it's easy to see when that line of credit will be tapped or where the money for salaries is coming from. It is, essentially, a picture of when and how the organization will pay its bills.
"They love the Cash Flow Report," she says, adding that it doesn't require expensive software, just a spreadsheet.
When the director of finance came on board 3 years ago, financial reports were passed out at the board meeting, giving no one time to really read them. Now, a carefully timed sequence of events is in place to ensure that financial reports are reviewed and understood by the time the board meets.
- At least one week before the board meeting, books are closed and reports generated.
- Detailed reports are reviewed by staff to find such things as errors in coding; figure out why something is over or under budget; and add comments as needed.
- Two days later, less detailed reports -- the ones in which line items are categorized -- go to the finance committee.
- Several days before the board meeting, the treasurer, the director of finance and any finance committee members meet via a conference call to discuss the reports.
- The reports, as vetted by the finance committee, are sent to board members two days prior to their meeting.
- The board meets and, ideally, the treasurer presents the reports for the approval of the board.
This multi-level review allows time for asking questions and for finding the answers. "Spend the time to go over the financials before the board meeting," the director of finance says. "Don't ever surprise them."
"Find a treasurer who will challenge you, who will ask hard questions!" the director of finance advises her peers. "I want a treasurer who is going to ask good questions and hold me accountable."
"The treasurer's job is to have a deeper level of diligence, to raise good questions," the former treasurer says. "The person in that seat has the responsibility to challenge financial matters. Raise questions for insight and understanding. If it's not clear to me, it may not be clear to my colleagues."
It is not, the director of finance notes, a matter of trust. Asking questions is the board's job, she says. "If you ask for something and [staff] doesn't give it to you, that's a warning," she says.
What can funders do?
If the key word in real estate is "location," the key word in financial oversight is "education." Funders, the board chair says, should mandate board education and fund it so that all board members, whatever their background, can understand financial reports and use them well in making decisions.