New to an Association Board? Here are the Top Three Things You Need to Know 

You’ve been super active in your association, working in various volunteer roles to support the future of the organization. Then one day you are asked to serve on the board. You want to help the organization be successful, but don’t know where to start. Here are the top three things you need to know to meet your fiduciary responsibilities as a board member.  

1. Know your fiduciary roles and responsibilities 

Board members act as fiduciaries of the association, which means they’re responsible for the mission and resources of the organization. This includes reviewing and approving the association’s mission and strategic direction, annual budget and key financial transactions, compensation practices, and fiscal/governance policies.  While states can adopt different requirements, board members typically have three legal duties: 

• Duty of care, which requires staying informed about the association, participating in meetings, and ensuring the mission is properly carried out by making informed decisions when voting, reviewing, and updating policies, and reviewing financial information. 
• Duty of loyalty, which requires members of the board to put the interests of the association before their own and limits conflicts with any personal interests or professional duties. 
• Duty of obedience, which requires board members to follow relevant state, federal, and local laws and regulations and ensure the mission of the organization is carried out. 

Board members must ensure that the mission of their organization is always front and center. Additionally, board members are responsible for allocating organizational resources in order to achieve the mission. This is accomplished by selecting the organization’s executive director (or CEO, etc.) and reviewing financial statements for accuracy and completeness. Beyond advocating for a worthy mission, board members assume many legal, fiduciary, and oversight responsibilities that can be difficult to understand. Before you join a board (or even as a newly appointed member), you should do your research to fully understand the commitment required of you. 

2. Know the key financial statements for nonprofits 

If your association is preparing financial statements that are compliant with generally accepted accounting principles (GAAP), there are three (potentially four) types of financial statements that you, as a board member, should be comfortable reading and reviewing. 

• Statement of Activities 
  This statement helps to evaluate an organization’s performance throughout the year. It consists of two main elements: revenues and expenses. Revenues are how the association generates income and expenses are the costs related to running the organization. It is the equivalent of an income statement that is prepared by a for-profit company. The biggest difference is that net income is not relevant to associations and instead they present a change in net assets. Board members should understand how their association generates revenues (membership versus educational offerings versus affinity offerings) and be able to ensure that expenses are appropriate for the organization. While an association’s goal is not to generate a profit, its operations should be self-sufficient so tracking revenue and expenses is very important. 
• Statement of Financial Position 
  This statement provides an accounting of the assets, liabilities, and net assets of the association. Assets are the items owned by the organization (e.g., cash, buildings, and property). Liabilities represent the amounts owed to others (i.e., outstanding debt). Net assets are the excess of assets over the liabilities (i.e., whatever is left over). This is similar to a for-profit entity, except, in lieu of owner’s equity, associations present net assets. As a board member, liquidity and debt are keys to financial success. An overly leveraged association may not be able to generate sufficient resources to pay its bills. Board members should evaluate the organization’s leverage regularly. 
• Statement of Cash Flows 
  This statement provides insights into the inflows and outflows of cash. It helps users assess the organization’s ability to generate cash and to pay its bills. There are three categories of cash flow: investing, financing, and operating. Investing activities are primarily made up of cash flows for long-term assets, such as buildings or equipment. Financing activities primarily consist of cash flows related to borrowing and repaying funds, like obtaining or paying back a loan. Operating activities are things that don’t fit into either of the other two categories. Some examples are payments to suppliers or employees and dues payments from members. Board members need to carefully consider how cash is being generated. If an association only generates cash through borrowing money instead of through operations, that raises concerns over the organization’s long-term sustainability.  
• Statement of Functional Expenses
  This fourth statement is optional, and the required information can either be presented as a financial statement or included as a note disclosure. This statement breaks down the expenses of an organization between those spent on the mission (program) and those that support the operations (general and administrative). Other potential types of expenses within supporting activities include fundraising and membership development. To help donors and members assess service efforts, GAAP requires the association to provide details of expenses by both nature (general ledger categories) and function (program versus support). Donors and members are especially careful about wanting their funds to support the mission. While an organization cannot sustain itself with no overhead, associations should ensure that the balance between overhead and program is appropriate to not turn away donors.  

These statements are required to help users have a clear picture of the organization. Users may include financial entities making lending decisions or even potential members. Board members are typically required to approve the financials. We have learned in hindsight that many troubled organizations were served by boards that approved financials without truly understanding them.  

3. Understand how to evaluate the health and financial performance of the association 

Association boards can use the information in the financial statements to assess how their organization is doing financially and to develop a strategic plan to improve. Ratios can be used to evaluate financial performance over time and to track improvements (or identify concerns). The different types of ratios that apply to associations can include liquidity, operating, and spending ratios. 

Liquidity ratios are used to determine whether the association has enough funds to support its payments. One type of liquidity ratio is the days cash on hand. This ratio helps an organization understand how long they would be able to pay their bills if no additional revenues came in. Another useful liquidity ratio, the current ratio, evaluates whether the association has enough funds to pay its current obligations. Meanwhile, the debt coverage ratio assesses the entity’s ability to pay its debt.  

Operating ratios, on the other hand, examine how the organization generates funds. The contribution ratio considers contributions and grants as a percentage of revenue, helping the organization understand how much they rely on donations. Many associations receive donations for scholarships for students entering the profession or receive grants for research. Associations also monitor the exchange ratio and its trend over time, which evaluates the percentage of their revenues that come from exchange transactions (such as dues, educational offerings, or goods sold). The fundraising efficiency ratio helps determine the value of donations raised for each dollar spent fundraising. Associations will want to ensure that each dollar spent on fundraising brings in sufficient revenue.  

Using ratios like these, associations can determine what areas of their organization require additional focus and where the organization is performing well. By knowing the financial health of their organization today, board members can plan and budget for tomorrow. 

Conclusion 

Once you understand the responsibilities of being a board member and have a grasp of the financial performance of the organization through reviewing the financial statements and performing ratio analysis, you’ll be well on your way to helping the association ensure long-lasting success.