Today, I want to share with you how to assess the current reality of your board's financial literacy. This series aims to equip you with the knowledge and tools to improve your financial governance and strengthen the decision making capability of your board members and your organization. 

How to Assess Financial Literacy in Nonprofit Board Members

      Let’s first start with identifying and assessing the current reality in your board, which sounds like an obvious first step, but may be more challenging and abstract when you really think about how to start…

•  What kinds of questions really identify financial literacy in your board?
•  How do you even begin to practically measure financial literacy?
•  Should you hand out papers at the board meeting?
•  Should you have an open-ended conversation about it? 
•  Should you do a survey? 

     All of those are valid tools and techniques. I really encourage you to consider what might work best for your board, based on the openness you sense and the amount of time you can practically spend assessing this at a board meeting.

Choose your Assessment Method

     Choose your method for board assessment. For instance, you might choose an open discussion, which is just to simply read these questions and take turns around the room answering them. This method is best suited to board members who feel very comfortable with each other, where a culture of openness and communication has been intentionally created. Alternatively, you may need to simply provide a printed questionnaire and ask each board member to spend 5-10 minutes filling it out at a board meeting before collecting them. The third method would be to send your questionnaire outside of a board meeting in the form of an online assessment or survey tool that they can complete. You could then gather those and share the results. (We’ll discuss assessment results in next week’s post!) 

12 Questions For Assessing Nonprofit Financial Literacy

     Today, I want to share some key questions that you could ask your board to assess their comfort level or their literacy when it comes to the finances of your nonprofit:

•  Do you feel comfortable reading or interpreting the financial statements? In other words, start off by determining if board members even understand the reports that they receive. 
•  Can you identify the balances of financial resources that are unrestricted, donor restricted, and board designated for cash reserves? This is an essential indicator of financial literacy within your nonprofit’s board. It ensures that they not only know how to read the financials in general, but also confirms their ability to identify the specific numbers with the greatest impact on the board’s decisions about spending.
•  Can you identify key components of the current budget and explain the process for developing and monitoring the budget? This helps determine if board members know how the whole budget process works or if the budget is more of a side thought that doesn’t receive much attention of its own.  Is the budget something that we actively engage in and use to both look back at past results and forward as we plan for future opportunities?
•  Can you identify the trends or patterns in our financial reports that indicate an area that needs attention or improvement? This answer could be as simple as a yes or no. Of course, if you’re discussing this in person they could certainly share some of those patterns and trends in greater detail, which would offer some training within the assessment.  This is a powerful way to do two things at one time.
•  How do you assess the financial health of our organization beyond simply looking at the revenue and expenses? I would definitely recommend a text answer here. How do your board members assess the financial health of the organization? Again, we're focusing on finances. While assessing performance and programs is also very important, we're focusing on finances in these questions.
•  What measures do you consider when evaluating the financial risk of our organization? Can you name some financial risks that could potentially impact our nonprofit? Now we're getting a little deeper into the threats of a SWOT analysis, like “What are some of those potential things that could really hurt us?”  “Do we have a granting source, for example, that's potentially going to be cut or decline?” That would be the kind of information you're looking for board members to articulate there.
•  Are you aware of the regulatory and compliance requirements that are relevant to our financial operation? This could include things like filing a 990, grant reports, etc.  Are board members aware of them and to their knowledge, are they being reported in a way that ensures the board knows these requirements are being fulfilled?
•  Can you explain the principles behind our cash management and investment policies? Do you know if we're in compliance with those principles? This relates not only to the resources we have available, but also how we should protect and potentially earn some appropriate yields (based on the risks we can take in light of our liquidity needs). Are board members aware of these policies? 
•  How well do you understand our organization's cash flow cycle and its impact on our operations and sustainability? This answer might be best expressed as a range of one to five, where one represents, “I have no idea” and five represents, “I can explain it completely.” Every nonprofit organization has cycles. You may have a cycle in which, once a year, you have a significant fundraising event. In this case, the months furthest away from that event may be known for cashflow concerns. Is your board familiar enough with this annual cycle to plan for it?. Perhaps you are funded in large part by year-end giving. In that case, the months outside of November and December may be lower cash flow months when there are more resources going out than coming in.
•   How knowledgeable are you about our diverse revenue streams and how much they each impact our budget? It may be that your board has the cashflow knowledge discussed in the previous point, but they’re only knowledgable about 50% of your revenue. Maybe the other 50% comes from fee for service grants, which are a very solid revenue source. They just lag two months in collection. So they are revenues that are consistently being received every month and billed every month, but they're always two months in arrears. So, once again, we could be looking for a range here. Do they understand completely? Do they have no idea? 
•  How comfortable are you participating in and contributing to financial discussions during the board meetings? Again, you can look for a range here. From  “I prefer to listen” to “I feel totally comfortable asking any question I think of, and I contribute all my thoughts and opinions at board meetings.”
•  What support or resources do you feel would be beneficial to improve your financial governance and your decision making ability as a board member? This is an open-ended question that can yield great insight as we move into financial literacy training, which we’ll discuss next week. 

     Those are the primary questions that can make a solid starting point for assessing the financial literacy of your board. The main point for this step is simply to start asking these questions. Next week, we’ll dive into what to do with the information that you gain from this assessment. Subscribe here so you don’t miss a single step in the series! 

To download a FREE copy of the Financial Literacy Assessment for Nonprofit Boards, click HERE!