Essential Questions

 Financial oversight is one of the most fundamental duties you have as a board member. It is important that you, and each member of your board, take the time to understand how the organization works, how the money is being spent, and what concerns or issues merit more in-depth discussion.

The external audit is an ideal time for this review because you have the benefit of the viewpoint provided by an independent financial professional.

Since most board members are not accountants or financial experts, the Greater Columbus Arts Council has prepared this pamphlet to cover three key issues and ten basic questions that can be asked -- and answered -- without the need to understand or scrutinize the detailed tables of a financial statement.

This pamphlet is organized with one section for each of the three key issues. At the beginning of each section we briefly explain the importance of the issue to your organization. The basic questions are numbered, with follow-up questions bulleted beneath. Try the follow-up questions whenever you hear answers that are incomplete or prompt concern.

You should be satisfied only when you feel that the organization is addressing each of the following four principles of sound financial management.

  • Establish broad goals to guide decision-making. Shifting priorities and circumstances can be accommodated with regular budget reviews, when annual goals and objectives are clear.
  • Develop approaches to achieve goals. Create timetables, personnel assignments, expected outcomes, and resource requirements for special projects. Know how each project affects the overall mission and goals of the organization.
  • Develop a budget consistent with goals and the approaches you've chosen to achieve your organization's goals. Make tough choices before finalizing the annual budget, and approve budgets only when expenses and revenues are realistic, and revenues balance expenses.
  • Evaluate performance and make adjustments. Ideally, internal financial reporting becomes the backbone of the management decision-making process because it compels regular communication about progress on priorities and allows for mid-course corrections. Take time each month or quarter to evaluate the budget and revise strategies.

    Every organization has its own approaches, reports, and ways of doing business. We hope that this pamphlet will help you to be a more effective board member of your organization.

    1. Sufficient available cash and reserves
    Adequate cash is fundamental to the smooth functioning, even survival, of an organization. You will want to know if there enough cash in the organization's checkbook to pay its bills in full and on time throughout the year. Were extraordinary steps taken to make the end-of-year checkbook look better than it was at other times during the year? As obvious as it may sound, a chronic insufficiency of cash and reserves may signal a need to change organizational habits.

    1.1. How much cash are we supposed to have? Do we have policies on holding sufficient cash?
  • Do we have a minimum cash requirement? What is our "Plan B" if we fall below that cash minimum?
  • Do we have requirements to set aside cash for specific purposes imposed by donors or by the board? How are we making sure the cash is and will remain available to fulfill those requirements?
  • What policies do we have on contingency, working capital, and board designated reserves and how are we complying with them today?

    1.2. How did we achieve the level of cash that we show for the end of the fiscal year?
  • During the year, what was the longest time we held off paying bills, or borrowed cash to pay bills, and what amounts were involved? Have payroll taxes been paid on time and correctly?
  • What happened to allow us to catch up on bills or reduce borrowing by the end of the audited year?
  • How much end-of-year cash was from prepayments, memberships, or subscriptions?

    1.3. Is there anything in the coming year that could have a significant impact on our cash?
  • What is our monthly cashflow plan and when do we have to be sure we have sufficient cash in hand for our next major production?
  • If we are utilizing our endowment or reserve to meet expenses, what is our plan to repay these?
  • Are there any lawsuits going on or grants that are being questioned? If so, have we made provision for a negative outcome?
  • Do we have an investment policy? Is it still appropriate for our risk tolerance? Are we following that policy?


    • 2. Meeting the budget and signs of financial distress
    Since the budget is the main tool used to oversee finances, it is important to determine where the budget may be wrong, misleading, or incomplete. When the audit is completed within 90 days of the end of a fiscal year, you have a timely opportunity to reforecast your current year budget. Look at what the audit tells you about the year just ended and compare that with how the budget assumes the current year will progress. It is acceptable, in fact desirable, to revise budgeted revenues and expenses in response to unanticipated developments throughout the year.

    2.1. Review the year and tell us in what ways our original budget (where we planned to be) differs from where we ended up (this audit)?
  • How did growth in revenues and expenses compare with the growth anticipated in our original budget and with the budget we just approved?
  • What are the differences between the last report to the board and this audit? Is the format different? Are the implications different?
  • What was the decision process for authorizing changes in revenues or expenditures from the levels approved in the original budget?

    2.2. What information does the audit contain that indicates a need to change this year's budget?
  • Is there anything reported in the audit that is not included in our budget (for example, capital campaign revenues and expenses, investment gains and losses, use of fund balances)?
  • What are the key assumptions in our current year's budget and how do they compare with the results shown in this audit?

    2.3. What clouds could there be on the horizon?
  • What were our operating results (revenues less expenditures) before use of endowments, borrowing, or exceptional gifts?
  • Do we have enough assets that we can convert to cash to pay all the debts and obligations that come due this year?
  • How long does it usually take to collect on billings and pledge? At what point do we decide that we will not receive the payments, and write them off?
  • How do our fund balances, revenue growth, and expenditure growth compare to the past 5 to 10 years?


    • 3. External audit, internal controls, and propriety of expenditures
    The annual audit provides an opportunity to learn whether the organization is spending money in line with the requirements of its mission, policies, donors, and the law. To get the most value from the independent audit, create an audit committee to work closely with the auditors and staff. Define the committee's responsibilities. These questions are intended to help you know that money is being used appropriately.

    3.1. Show that our spending is focused on the mission.
  • What is the percentage of expenses spent on program, fundraising, and administration and how have those percentages changed in the last year from the previous five years?
  • Convince me that our spending last year was consistent with our mission.

    3.2. Review the ways we ensure our spending is consistent with our policies and with nonprofit regulations, and tell us about any special steps to be taken this year regarding restricted funds or reserves.
  • What safeguards do we have to prevent fraud and abuse?
  • What is our internal mechanism to review how our restricted funds were spent versus how they are required to be spent?
  • Did we use, or borrow, restricted funds for unrestricted operating purposes at any time during the year? If so, how will it affect our end of the year financial position? What are the implications for the current year?
  • What are some events that could affect our ability to access cash from our endowment, from bond proceeds, or from bank loans? Are we in danger of some of those events occurring this year or next?

    3.3. What are the individual responsibilities of the board and the chief executive for the fiscal results we are seeing?
  • Are our systems and management in place to enable us to produce a board-approved audit in 90 days? Are our board meetings scheduled to allow this?
  • What are the board's expectations of the chief executive for fiscal results and are those expectations part of the annual performance evaluation?
  • Who on the board and on the staff have we assigned to work with the auditors?

    3.4. What are the differences between what the auditor found and what the internal accountant recorded? To ask of the auditor at the board meeting:
  • What adjustments or suggestions does the auditor make in the audit, management letter, or other communication, and what actions do we plan to take in response to each adjustment or suggestion? (A management letter can be an excellent way to document strengths and weaknesses of internal controls. Bring it to the attention of the full board.)
  • Is there anything now or in the next year that would lead the auditor to provide a "going concern" notation, a qualified opinion, or other special communication on our organization's financial health? Does the auditor worry about theses circumstances for any of its other nonprofit clients?
  • Does the auditor have concerns that the staff are able and skillful enough for what we are asking of them?