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Financial Literacy of Not For Profit Boards: The Case for Action [Blog]

A recent study of the financial literacy of NFP boards should give boards and directors pause to think about building the right skills to manage their organisations now and into the future.

Findings on NFP financial literacy

Pro Bono Australia partnered with Grant Thornton to undertake the study, which drew on a survey of over 1,000 NFP board directors and senior managers.  It provided some thought provoking results, including that:

  • Only 59% of respondents thought their board had adequate financial literacy to meet the current needs of their organisation
  • Even fewer, only 40%, thought the board’s financial literacy would be sufficient to meet future challenges
  • Financial literacy was assessed as lowest in areas where directors were appointed solely from the member base.  Having directors independent of the member base was correlated with assessment of greater financial literacy.
  • A significant proportion of directors indicated that they rely on others when it comes to financial matters:  22% said their boards were completely reliant on management in financial matters, and 22% said they relied on a subset of the board.

The survey indicates a strong need to improve financial literacy skills among NFP boards, to better equip them to govern their organisations now and through future challenges.

Why does financial literacy matter?

The results are important given the vital role that financial management plays in organisational success.  To be effectively driving performance, boards need adequate financial skills.  Having the right skills on board will be key to a prosperous organisation and to the strength of the NFP sector.

For individual directors, their personal obligations mean that it is critical to reflect on and strengthen individual capacity in this area.  Legally, the courts have set a clear expectation, in cases such as Centro, that a certain level of financial literacy is an essential qualification for directors, and directors cannot abdicate this responsibility through reliance on others.

What do directors need to know?

Recent research by Jackie Bettington with QUT, sponsored by Westpac (Davidson Institute), drew on expert views to define what it means for a director to be financially literate.  Working with accountants, directors and educators, the project produced a Director’s checklist for basic financial literacy:

Overall, you need to know how to work out

  • If you are solvent
  • If you can service your current debt commitments
  • If you have enough cash on hand for operations
  • Your financial position
  • Whether your actual financial performance is meeting your budgets and/or forecasts
  • Whether or not you have received a favourable audit opinion
  • Whether you meet the ‘going concern assumption’

Generally speaking, you will be able to do this if you understand the definition and purpose of the following financial concepts:

The balance sheet, including:

  • Assets (including current and non-current)
  • Liabilities (including current and non-current)
  • Equity
  • Reserves

The statement of cash flows, including:

  • Operating activities
  • Financing activities
  • Investing activities

The income statement, including:

  • Income
  • Expenses
  • Profit/loss
  • Profits vs cash at bank
  • Measures of profit (eg EBIT, EBITDA, NPAT)

(Bettington 2015)

What should boards and directors be doing?
Boards and individual directors can take a range of steps to enhance financial literacy and competence, including:

  • Assessing financial literacy as part of the recruitment of all directors
  • Where board directors are identified as potentially weak on financial skills (but selected for other contributions they will make to the board), taking action to upskill them before or shortly after they join the board
  • Including financial skills and understanding of the organisation’s finances as part of director induction
  • Mentoring and coaching for directors to enhance financial literacy and confidence
  • Independent assessment of board performance and individual director contributions

 

Brodie has a focus on developing governance standards and practices to promote organisational performance. Her interest is in assisting boards and leadership teams to develop and improve frameworks that allow the collective experience of the governance group to be harnessed to achieve better outcomes for the organisation.