Monitoring Financial Results
The board’s responsibility to protect the interests of the organization’s owners includes monitoring financial performance. Many boards request financial reports on a monthly basis. Others might review finances every quarter. Some CEOs provide the board with a sparse one-page financial report that provides inadequate information. Others compile an inch thick package in which the board-relevant numbers are buried.
Many boards simply ask for a financial report and leave it up to the CEO and CFO to determine what to include. However, a proactive board is very specific in its request. It might ask for a one-page balance sheet showing this year’s figures to-date and last year’s figures at the same date; a two-page income and expense statement with this year’s and last year’s year-to-date figures as well as this year’s budget year-to-date; and a report explaining every line on the income and expense statement that varies from budget by more than 5%. Some boards ask for a cash flow report monthly, others ask annually. This statement allows the board to review the organization’s ability to meet its financial obligations. The board might also ask for some key financial ratios such as profit as a percentage of gross income. The report should include the numbers that quickly allow the board to determine if the budget parameters are being met.
Because most people need time to review information and think about it before they are prepared to ask relevant questions or make quality decisions, the financial report should be provided to the board members a few days, or perhaps a couple of weeks, before the meeting. Since the board members can review the materials in advance, there is no need for a financial report to be provided verbally at the meeting. Instead, board members ask about matters that were not clear to them or about variances from budget or budget parameters that concern them. If the report shows that financial performance is congruent with the budget, there is no need for discussion at the board meeting. The board can pass a motion to receive the financial report, indicating that they monitored financial performance, and move on to the next agenda item. Be careful not to pass a motion indicating the board approved the financial report as that implies that the board is saying the report is accurate. This motion is only appropriate after the year-end audit is completed and the auditor confirms that the financial statements are materially correct.
If the financial report shows that the budget is not being met, the board should assess whether year-end financial outcome is likely to be adequate to meet projections and obligations. Ideally, the CEO or CFO will have commented on this in the financial report. If not, it is appropriate for the board to ask questions, and if necessary to ask the CEO to provide a plan of corrective action by a specific near-future date. The board reviews the revised plan, asking for more information, until it is satisfied that the CEO is leading operations in a manner that will achieve annual goals or board-approved modified goals.
Board members are trustees for the owners or members of the organization. As such they have a responsibility to oversee financial performance, to hold the CEO accountable to achieve financial goals, and to use board meeting time wisely by moving on to other big picture discussions when financial affairs are in line.
