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Aspects of a Financially Healthy Nonprofit

You’ve been approached to join the board of a local nonprofit – congratulations! Committing yourself to a trustee role at any organization is a big responsibility, though, so do your homework before you agree to join the board. You owe it to yourself to understand who and what you are committing to before you attend your first board meeting.

First, who are you committing to? Since you’ve been asked to join the organization’s board, you likely have a good familiarity with the organization, at least some of its management, services, and clients. If this isn’t true, reconsider joining the board at this moment and take some time to get to know the organization more deeply! 

Assessing Financials Before Joining a Nonprofit’s Board

A trustee is a fiduciary of the organization, meaning that the board is ultimately responsible for the nonprofit’s financial health. If you are familiar enough with the organization, think about what you know and how you know it. First, do you know anything about the financial health of the nonprofit? Have you seen any financial statements, like the IRS 990 filing, publicly available annual reports, or other documents? Is the organization willing to share them with you? Transparency is an essential marker of a healthy organization, so if these things are not readily available to you, consider what this might mean. However, don’t just take the organization’s (or board’s) word for it. Be sure to do your due diligence with the information you are provided. Look for gaps in the information and ask questions to fill those gaps. If you can’t fill the gaps, ask the organization for more information.

When you assess the nonprofit’s financial health, ask to look at its profit and loss statement to identify revenue streams (what do the programs generate? How robust is fundraising? Does it generate any revenue in other ways, such as facilities rentals?). The P&L will also reveal the organization’s expenses and what kind of significant burdens it might be managing, such as credit lines, mortgage payments, or loans. All of this information is just that, information, and it is up to you to make a judgment about the organization’s financial health.

Reviewing the Nonprofit’s Structure

Who do you know in the nonprofit’s management? Do you know any staff? Are you impressed by them? What is the organization’s reputation in the community? The people that run the nonprofit are the face of its mission, and if you are not familiar with these folks, ask to be invited to an event or other opportunity to see them in action. Ask around in the organization’s service community: are they well-liked and respected? An organization doing good work, collaborating with the community, and being a good neighbor is unlikely to be flailing.

What do you know about the board you are potentially joining? Do you know any other trustees? Do you like and respect them? Has their outreach to you been respectful and friendly? Do you think you can work with them collaboratively and professionally?

How does the board itself operate? You can, and should, ask questions to get a clear picture of how seriously and professionally the board takes its responsibilities. Does the board understand its role in governance, and does it stay out of the nonprofit’s operations? A board that is overly involved in the day-to-day running of a nonprofit is, generally speaking, overstepping its role. 

In addition to questions about general board best practices (like term limits or conflict of interest statements), how often they meet, and do they meet in person or via a video call, signs of a well-functioning board can include a robust committee structure. Committee subject areas can consist of Finance, Facilities, Development (Fundraising), the Committee on Trustees (trustee recruitment is here), and more specialized committees relevant to the kinds of services the nonprofit provides (Programs or Education, for example). Understanding how the board values each committee’s work is a good clue regarding the healthy functioning of the board.

Understanding the Long-Term Vision

Another way to assess the longer-term health of the organization is to ask the board chair about the work the board is doing (or has done) regarding strategic planning and adherence to the mission. Are the board and organization engaging in planning for the future? Are they looking ahead and using data to forecast where they might be headed? Although no organization can see the future, strategic planning is a vital component of ensuring that a nonprofit moves in the right direction and makes sound financial, programmatic, and resource decisions to support its services. If the board is not engaged in this vital work or hasn’t been before, be sure to ask questions about how the organization plans for its future.

Finally, make sure you clearly understand what the board expects from you. If the recruiting process has not clarified what it expects your commitments to be (time, treasure, and talent), it is in your best interests to ask, so you are not surprised throughout your board service. Some boards engage new members because they are in a fundraising mode, looking to break ground soon on a capital project. This board will be interested in not only your financial support but in engaging with your network of friends and colleagues to identify prospective donors. A board that will be embarking on a strategic five-year planning process might be hoping you will lend your strategic talents to the process. A board that is expanding its programming might be interested in leveraging your experience in the program area or a potential new client base. Understanding why you were identified as a good board prospect can help you determine what level of service you are willing to commit to.

Nonprofit board service can be gratifying if you are committed to the organization’s mission and vision, enjoy your colleagues on the board and find that your contributions are valued and useful. Doing some homework ahead of time can help you avoid situations that are unpleasant surprises and ensures a board term that serves you and the organization.

Published: May 17, 2022

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