Financial management can be intimidating for many nonprofit professionals, especially those new to oversight roles in nonprofit organizations. One of the primary oversight roles is that of the finance committee. What exactly is the role of a nonprofit finance committee? Why is the finance committee important? This introductory guide shares nonprofit finance committee best practices to help prepare you and your organization for success.
What does a nonprofit finance committee do?
A nonprofit finance committee is one of the most important pillars of your organization and leadership structure. The finance committee provides overall financial oversight of your nonprofit. Its members help to ensure that your organization has the necessary resources to provide programming and deliver your mission in the community.
What are the responsibilities of a finance committee?
The finance committee oversees a nonprofit’s funding and spending. Specifically, a nonprofit finance committee is responsible for:
- Approving the annual budget
- Monitoring monthly financial statements
- Overseeing financial reporting, including the annual IRS Form 990 and all required tax filings
- Ensuring the organization has the cash reserves and investments necessary for long-term success
Who should be on your nonprofit finance committee?
One of the most common mistakes nonprofits make is not having a nonprofit finance committee with members who have the right mix of knowledge and experience in nonprofit financial management.
The ideal size for a nonprofit finance committee depends on the size of your organization but generally consists of three to five members. When establishing your finance committee, it is essential to have someone with financial expertise who can evaluate the overall health of your organization. While not mandatory, having a CPA is extremely helpful to provide the financial skillset to serve that role.
Additionally, identify at least one person who has experience in nonprofit financial reporting. While not everyone on the committee must have a nonprofit background, it is helpful to have someone with experience serving in a CFO (chief finance officer) role or corporate accounting position supporting a nonprofit.
Finally, the majority of the finance committee should consist of independent members. This means the committee members are not part of the nonprofit’s management staff or do not have other ties to the organization.
READ NEXT: How to Recruit Nonprofit Board Members
What kinds of questions should nonprofit finance committee members be asking?
One of the most important things that nonprofit board and finance committee members can do is ask insightful questions. Members shouldn’t just rubber-stamp financial documents; they need to understand what they approve because they have fiduciary responsibility for the nonprofit organization.
Here are some questions board and finance committee members should continually pose to the executive director or CEO and staff leadership:
- Do we have enough cash inflows to cover operations, or are we living off reserves?
- Do we have enough cash on hand to cover at least three months of operating expenses?
- What portion of our funds are we spending on program activities?
- Are we raising funds from a diverse array of donors and sources? Are we relying too much on grants? Are we growing our donor base?
- How much does it cost for us to raise a dollar?
- How much are we spending on administrative expenses?
What best practices should our nonprofit finance committee follow when selecting an external auditor?
When it comes to financial audits for your nonprofit, here are a few things to keep in mind:
- Do your homework. The American Institute of CPAs (AICPA), the world’s largest member association representing the accounting profession, offers resources, publications and events to foster high-quality performance by auditors.
- Ask for an auditor’s peer review report. Auditors get peer-reviewed where others come in and look at their work. That report is public information and can provide some comfort related to the audit firm’s controls and quality.
- Ask for references. It seems simple, but when you’re doing an RFP and asking for information from auditors, ask for and check references.
- Look for a trustworthy advisor. You need an audit firm that thinks you’re important, will communicate with you regularly and be proactive in serving your needs.
- Keep in mind that the cheapest option may not be the best option. Look for a firm that offers value and advice, and that supports your organization and its mission.
What is the difference between an audit committee and a finance committee? Does my organization need both?
An audit committee focuses on the hiring and performance of auditors to perform an annual financial audit of your organization, while a finance committee oversees the management of financial resources, such as cash flow and other important practices. Whether you need both committees depends on the size of your organization. Larger organizations may have a specialized committee to oversee the auditing process, but smaller organizations typically have their finance committee take on both roles.
Get Your Certificate in Nonprofit Financial Management
The Nonprofit Leadership Center’s Certificate in Nonprofit Financial Management will provide you with the basic skills and knowledge needed to establish and maintain a strong financial management system.
This two-day program will build your ability to make sound decisions that affect your nonprofit’s programs and operations with a focus on best practices. Courses will demystify financial jargon and teach you about financial record-keeping. Class material uses easily understood and relevant case examples and engaging, interactive explanations for financial terminology, assumptions and concepts.
Be the first to hear about the latest nonprofit tips, resources and training classes at the Nonprofit Leadership Center. Sign up to receive our weekly NLC e-newsletter to thrive personally and professionally.