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When a nonprofit has a vital and engaged finance committee, it sends a strong signal to stakeholders — namely, that the organization is committed to responsible stewardship of its financial resources and long-term sustainability. The first step to setting up a committee is for your board of directors, staff and the committee members themselves to understand the committee’s proper roles and responsibilities.
Beyond report review
The finance committee is charged with overseeing — and keeping the board of directors apprised of — your organization’s overall financial health. Ideally, this entails more than simply scanning financial reports.
The most valuable finance committees take a strategic role when it comes to oversight and planning. Active involvement not only pays off with robust financial governance but also boosts the satisfaction level of committee members. And active involvement improves retention. Conversely, members asked to do nothing more than routinely review reports may come to dread meetings and can grow to regret accepting the job.
Wide range of responsibilities
Although the exact parameters of the participation of committee members will vary based on factors such as staff size and organizational budget, the finance committee generally should be involved in the following tasks:
- Budgeting and financial planning. Before the budgeting process begins, the committee should identify key assumptions and initiatives that will influence the process. Members and staff must discuss internal and external factors that could affect budgets over the next several years, including your organization’s strategic plans. After approval, the committee also monitors budget adherence and flags worrisome variances.
- Financial reporting. The committee oversees the preparation and distribution of financial statements and sets expectations for the nonprofit’s staff about the level of detail, frequency, and deadlines of other financial reports. It monitors the adequacy of the organization’s financial resources and their allocation toward the accomplishment of its mission. Simultaneously, the committee ensures that donor-imposed restrictions are being met. Additionally, the committee evaluates if the resources are sufficient to support expected program and operating expenses.
- Internal controls. Internal controls are essential for protecting your organization’s assets. The finance committee should work with staff to develop effective controls and policies and document them, for example, in a manual. The committee also must make sure that approved controls are followed, and filing deadlines met.
- Administration of financial resources. The finance committee establishes and confirms compliance with fiscal and related policies and procedures. Approved policies should reflect your organization’s specific circumstances, such as size and life-cycle stage, rather than just general “best practices.” The committee should take care, though, not to overstep. It must respect the line between the development of overall policies and the development of specific staff processes and procedures.
- Communication with the board. The committee works with staff to determine the best way to convey information the board needs for sound decision-making. Not everyone understands financial jargon. Numbers require explanation and context; the committee must connect them to the organization’s mission, goals and strategies.
- Audits. If your organization doesn’t have a separate audit committee, the finance committee also is responsible for independent audits. The committee must engage and regularly interact with the auditors, review the audit report (and Form 990), present the audit report to the board and propose changes to implement any auditor recommendations.
- Investments. Even if your organization doesn’t have enough cash to support a separate investment portfolio, liquid funds need to be managed to maximize earned revenue. This means it falls to the finance committee to develop and execute an appropriate investment policy and retain qualified investment advisors, when needed. A separate investment committee is advisable, though, for organizations with substantial reserves, planned giving programs or endowments.
While an active finance committee is crucial for your organization’s health and reputation, it’s important to remember that fiduciary responsibility isn’t limited to the committee’s members. The entire board has the duty to safeguard your nonprofit’s financial welfare.