When defining the responsibilities of a nonprofit’s finance committee, scanning financial reports should be the bare minimum. Your finance committee should advise your board on your organization’s financial health. An engaged finance committee shows a commitment to the nonprofit’s long-term sustainability. Here are some best practices to consider.

Finance committee responsibilities

Your organization’s staff size and budget will determine the exact parameters of finance committee member participation. But the finance committee’s fundamental duty is to communicate with the board. So it needs to work with your staff to determine the best way to convey information the board needs for sound decision-making.

Remember, not everyone understands financial statements and related jargon. Numbers require explanation and context. Therefore, the finance committee must connect the numbers to the organization’s mission, goals and strategies.

Best practices

At a minimum, ensure your finance committee has the ability to:

1. Set budget and financial planning. Before beginning the budgeting process, the committee should identify key assumptions and initiatives that will influence the process. Members and staff must discuss internal and external factors that could affect budgets over the next several years, including your strategic plan. After approval, the committee should monitor budget variances.

2. Oversee financial reporting. The committee oversees preparation and distribution of financial statements and sets expectations for your nonprofit’s staff about the level of detail, frequency and deadlines of other financial reports. It also monitors the adequacy of financial resources and allocation toward accomplishing your nonprofit’s mission. Simultaneously, the committee ensures that donor-restricted contributions are being met. Finally, it decides whether financial resources are sufficient to support expected program and operating expenses.

3. Develop internal controls. Internal controls are essential for protecting your organization’s assets. Have your finance committee work with staff and outside experts to develop effective controls and document them. It’s also up to the committee to make sure that approved controls are followed and filing deadlines are met.

4. Administer financial resources. The finance committee is responsible for establishing and confirming compliance with fiscal and related policies and procedures. Approved policies should reflect your organization’s specific circumstances, such as size and life-cycle stage. The committee should take care, though, not to overstep. It must respect the line between oversight of general policies versus actual implementation and execution of specific staff processes and procedures.

5. Oversee audits. If your organization doesn’t have a separate audit committee, the finance committee is also responsible for audits. The committee must engage and regularly interact with auditors, review audit reports and IRS Form 990 filings, present audited financial statements to the board, and propose changes to implement any auditor recommendations.

6. Create an appropriate investment policy. Even if your organization doesn’t have enough cash to support a separate investment portfolio, liquid funds need to be managed to maximize revenue. The finance committee needs to develop an appropriate investment policy and retain qualified investment advisors, when needed. A separate investment committee is advisable, though, for organizations with substantial investments, planned giving programs or endowments. And remember that fiduciary responsibility isn’t limited to finance committee members. The entire board is responsible for safeguarding your organization’s net assets.

On the road to success

An active finance committee is crucial to maintain your nonprofit’s health and reputation. The success of your finance committee depends on effective communication between the finance committee, your board and your staff.