Nonprofit Board Members: 7 Financial Warning Signs to Watch

Financial oversight is one of the most critical responsibilities nonprofit board members hold. Ensuring that your organization remains financially healthy isn't just about reviewing reports during meetings—it’s about identifying potential red flags early and addressing them before they jeopardize the mission itself.

This guide will help nonprofit board members understand and recognize the key financial warning signs to look out for, empowering you to make well-informed decisions to keep your organization thriving.

Why Financial Oversight Matters for Nonprofit Board Members

As a nonprofit board member, you are a steward of your organization’s mission and resources. But what happens when financial difficulties threaten those resources? Without proper oversight, financial issues can spiral, resulting in damaged trust, reduced funding, or even the shutdown of operations altogether.

Your role isn’t to act as the accountant, but to ask the right questions, ensure transparency, and align the organization’s financial health with its mission.

7 Financial Warning Signs Nonprofit Board Members Should Watch

1. Consistently Late Financial Reports

Consistent delays in receiving financial statements are a major red flag. Timeliness is critical for nonprofit board members to monitor the organization’s financial status. Late or incomplete reports could indicate inefficiencies, understaffing, or attempts to conceal issues.

What to Do: Require timely monthly or quarterly financial updates. If delays persist, work with leadership to understand what’s causing the slowdown and ensure adequate resources are allocated to bookkeeping and reporting functions.

2. Declining Revenue and Unmet Fundraising Goals

Nonprofits depend on diverse revenue streams, such as donations, grants, and program fees, to stay afloat. A decline in revenue or a consistent pattern of missing fundraising goals can signal trouble ahead for sustaining programs.

What to Do: Ask for year-over-year comparisons of revenue to identify trends. Explore whether donor engagement strategies need revamping or if external factors, like economic downturns, are affecting your funding.

3. Growing Expenses Without Corresponding Revenue

It’s common for nonprofits to face growing program demands, but if expenses continuously outpace revenue, the organization risks financial instability. This is especially concerning if unrestricted funds are depleting to cover deficits.

What to Do: Review budget-to-actual comparisons during board meetings. Scrutinize areas where spending has increased and assess whether cost-saving measures or alternative funding strategies are necessary.

4. Relying on a Single Revenue Stream

Putting all your “funding eggs” in one basket—whether it’s a grant, a major donor, or a particular fundraising event—can leave a nonprofit vulnerable. If that source dries up, the organization might struggle to operate.

What to Do: Advocate for diversifying income sources. Encourage the development of new revenue avenues, such as corporate sponsorships, planned giving programs, or fee-for-service models, to sustain long-term stability.

5. Unplanned Use of Reserve Funds

While reserve funds are critical for emergencies, frequent or unplanned withdrawals can signal poor planning or deeper financial issues. Raiding reserve accounts to cover operational shortfalls is unsustainable.

What to Do: Ensure the organization maintains a clearly defined reserve policy. Regularly evaluate reserve levels to confirm they’re sufficient for emergencies or unforeseen circumstances, without becoming the first line of defense for everyday shortfalls.

6. High Staff Turnover in Financial Roles

Regular departures from key financial positions, like CFOs or bookkeeping staff, should raise eyebrows. High turnover in these functions can disrupt financial management and accountability.

What to Do: Focus on improving job satisfaction and retention for key financial staff. Conduct exit interviews when team members leave to identify underlying issues and ensure they don’t compromise financial stability.

7. Lack of Independent Audits

Nonprofits are expected to conduct independent audits regularly to ensure accountability and uphold donor trust. Skipping audits—or receiving repeated “qualified opinions” from auditors—can damage your reputation and potentially signal larger issues.

What to Do: If your nonprofit hasn’t conducted audits recently, prioritize implementing them. For smaller nonprofits, consider a financial review by an external CPA. Always act on auditor recommendations to improve financial policies or processes.

How to Establish Effective Financial Oversight as a Nonprofit Board Member

Learn the Basics of Financial Management

Every nonprofit board member should have basic knowledge of financial statements, including balance sheets, income statements, and cash flow reports. Don’t hesitate to ask for training or guidance from financial experts.

Build a Strong Finance Committee

A dedicated finance committee can provide specialized oversight and accountability. This team can work closely with staff to handle budgets, audits, and financial strategies, while reporting findings to the board.

Foster a Culture of Transparency

Encourage leadership to provide full financial disclosures. Transparency builds trust—not only within the board but also with donors, stakeholders, and the community.

Ask Questions—Even the Tough Ones

If something doesn’t add up, don’t hesitate to ask. Your questions could help uncover potential issues before they escalate. Active engagement from board members is a key asset in maintaining a nonprofit’s financial health.

Partnering With Experts for Financial Success

Managing a nonprofit’s finances can be complex, but you don’t have to go at it alone. At SD Mayer & Associates, we specialize in helping nonprofits achieve financial transparency and success. From guidance on financial reporting to creating strategic plans for sustainability, we’re here to help you make a lasting impact.

Interested in learning how we can assist your nonprofit? Contact us today to see how we can help your board grow stronger, smarter, and more effective.