Why Every Not-for-Profit Needs a Strong Finance Committee

For any not-for-profit organization, the board of directors plays a central role in governance but relies on committees to function effectively. Committees manage specific tasks, offer advice and structure the board’s work. The finance committee stands out, providing oversight that safeguards the organization’s fiscal health.

A well-structured finance committee strengthens the organization’s financial foundation and simplifies complex financial information for the board. In conjunction with other thoughtfully designed committees, the board can efficiently delegate tasks and focus on advancing the organization’s mission.

Below, we’ll explore how a finance committee supports a not-for-profit board while highlighting other essential committees that can enhance the board’s overall effectiveness and governance.

The Role of the Finance Committee for a Not-for-Profit Board

The primary responsibility of the finance committee is to ensure that the organization’s financial practices are sound and aligned with its mission. This committee serves as a bridge between day-to-day financial management and the board's overall responsibility for governance. By reviewing and approving budgets, monitoring financial statements and overseeing financial policies, the finance committee helps the board make informed decisions that impact the entire organization.

Here are some primary functions the finance committee typically performs:

• Budget Review and Approval: One of the finance committee's most important duties is reviewing and approving the organization’s budget. This process guarantees that the budget aligns with the organization's strategic goals and that resources are allocated effectively.
• Financial Statement Review: Internal financial statements give the committee a pulse of the organization’s financial health. Through regular monitoring, the finance committee can identify trends, forecast cash flow needs and establish that the organization can meet its obligations.
• Financial Policies and Reserves: The finance committee approves financial policies and tracks the organization’s reserves. Sometimes, the committee may recommend establishing an operating reserve to secure stability during economic fluctuations.
• Audit and Compensation Oversight: In many not-for-profits, the finance committee may also function as the compensation or audit committee. If your organization undergoes an annual audit, clarifying whether the audit or finance committee should manage it is critical. It’s best practice for the auditor to report directly to the committee, allowing the full board to receive summarized information.
• Regulatory Compliance and Reporting: The finance committee oversees regulatory compliance, including IRS filings such as Forms 990 and 990-T. It’s important to note that the 990, in particular, is not just a filing requirement but an important document that tells your organization's story. The committee needs to approach it with the care and attention it deserves.
• Internal Controls and Worker Classification: Other responsibilities include monitoring internal controls and confirming that the organization adheres to proper worker classification standards. These tasks help protect the organization from legal and financial risks.

Streamlining Financial Discussions for the Full Board

When the finance committee presents to the board, it must focus the discussion on the big picture. Board members often come from varied backgrounds and may not have extensive financial expertise. Presenting overly detailed financial reports, such as pages of general ledger data, can overwhelm and confuse board members.

Instead, the finance committee should offer a high-level overview of the organization’s financial position. Focus on the key areas that board members need to understand and act upon, such as:

• Cash Position: Does the organization have enough cash to meet its obligations?
• Debt: Is there any significant debt the board must be aware of?
• Revenue Streams: What are the organization’s main sources of revenue, and are there opportunities for additional income, such as unrelated business income (UBI)?

By concentrating on these core issues, the finance committee can help the board make informed decisions without getting bogged down in unnecessary details.

Customizing Your Not-for-Profit Board’s Structure

While the finance committee is one of the most critical committees, a well-functioning not-for-profit board benefits from a multiple-committee structure. Every organization is different, and while some may require numerous committees, others may combine several functions into a few key groups. The goal is to delegate tasks and responsibilities efficiently so the board can operate smoothly.

Some other committees for a not-for-profit board include:

• Executive Committee: This committee acts on behalf of the board when it is not feasible to convene the full board. Any decisions made by the executive committee must be documented and communicated to the rest of the board.
• Development/Fundraising Committee: This group oversees the organization’s fundraising efforts, ensuring strategies are in place to generate the revenue needed to support the mission.
• Investment Committee: If the organization has invested assets, the investment committee monitors investment policies, assesses risk and conducts due diligence on investment managers and opportunities.
• Human Resources Committee: This committee focuses on employment regulations and ensures compliance with federal and state laws governing employee rights and benefits.

Every not-for-profit has unique needs, and there’s no one-size-fits-all solution to forming committees. The key is to create committees that suit the board’s specific needs so it can focus its undivided attention on high-level governance and strategic planning.

Connect With US

CBIZ offers dedicated resources and expert guidance to help not-for-profit organizations navigate everything from financial services to employee benefits while ensuring compliance with federal and state regulations. For more details, connect with your local CBIZ not-for-profit professional.