6.1 The board oversees appropriate use of the organisation’s resources
6.2 The board approves an annual budget for the organisation
6.3 The board receives and considers measures which evaluate performance
against the strategy
6.4 The board oversees the performance of the CEO
6.5 The board monitors the solvency of the organisation
For an organisation to pursue its purpose it must set clear
goals and timeframes within which they are to be achieved
and measure its progress in achieving them. The board
must work with organisation’s staff, if any, to identify
these goals, make resources available to achieve them and
oversee the appropriate use of these resources.
Oversight of resources
Resources are the tools that organisations use to achieve
their goals. Resources can generally be grouped under four
- Financial (such as cash reserves, credit and investments);
- Physical (such as real estate, equipment and vehicles);
- Human (such as employees, volunteers and their skills);
- Intellectual (such as copyrights, brands and data).
Directors have an important role to play in overseeing the
proper use of these resources. The board must understand
what resources the organisation has access to and
make them available, with appropriate controls, for the
achievement of the organisation’s goals.
NFPs have a special obligation under the
law to only apply their resources for their
purpose and not for the private benefit of
the people involved with the organisation.
It is common for boards to oversee the development of
policies that set out how resources must be properly used
and maintained. For example, most boards will establish
a policy about who can spend the organisation’s financial
resources and under what circumstances they can be
spent. It is common for organisations to establish policies
concerning appropriate use of technology, management of
intellectual property and human resources.
Beyond focusing on the appropriate use of resources,
boards should also consider whether resources are being
used efficiently. One of the key ways the board does this
is through defining performance targets, often called key
performance indicators (KPIs). These targets help the
board to monitor progress against defined measures, which
should be aligned to the organisation’s goals.
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Budgeting is an important annual process that helps
organisations to identify and plan for future needs, and to
allocate resources accordingly. Budgets generally last for a
12-month period and are focused on forecasting revenue
and expenses, though may include consideration of other
resources and measures. It is common for management to
develop the budget and for this to be approved by the board,
but boards may take a more active role in this process in
The purpose of the budget is to align an organisation’s
resources to its goals and to set parameters around how
resources will be used across a year. For example, the board
may authorise management to spend the organisation’s
financial resources within the budget but may require
approval for any expenditure outside the approved allocations
or above a certain amount.
Boards will generally review the organisation’s performance
against its budget at regular intervals using ‘management
accounts.’ These are internal documents that track
performance against the budget.
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For an organisation to know what it is doing and how its
activities contribute to achieving its purpose, it must define
and evaluate its performance against defined measures. There
are a wide range of performance measures that are used across
the NFP sector. Boards should select a mix of both financial
and non-financial performance measures to help it develop a
more complete picture of the organisation’s performance.
Generally, performance measures should be:
- Meaningful to the organisation;
- Capable of being measured and acted upon;
- Cost effective to produce;
- Comparable; and
- Simple (where possible).
One of the ways the board can align the work of the
organisation to its purpose is through defining performance
measures that support the organisation’s purpose. Defining
and overseeing these measures enables the board to develop
accountability – both in its reporting to external stakeholders
and in holding management to account. This is discussed in
greater detail in Principle 7: Transparency and Accountability.
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Performance of the CEO
As part of providing oversight of the CEO, the board
should define and evaluate performance measures for
the CEO which are aligned to the organisation’s purpose
and the strategy. This way the board can keep the CEO
accountable for their performance. Generally, the CEO
will use their own performance measures to inform the
measures for other staff. This helps align the activities of
everyone involved in the organisation with the purpose.
Boards should be careful in the development of these
performance measures. People will naturally orient
themselves to work towards meeting their performance
targets (especially if there is an incentive for doing so) and
so the form these measures take can significantly influence
the way that the people in the organisation behave. This is
discussed in greater detail in Principle 10: Culture.
The board should provide regular and honest feedback
to the CEO on performance including the board’s
expectations. The CEO also has a responsibility to keep
the board informed about progress against performance
measures by providing regular reports. This will help the
board form an opinion about the CEO’s performance and
inform the feedback they provide.
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Directors are required to read and understand financial
information so they can play their part in monitoring the
organisation’s financial health and performance. This is
part of the duty of directors to act with care and diligence
which is discussed in greater detail in Principle 2: Roles and responsibilities.
Importantly, every director has a responsibility to
understand the organisation’s finances and to contribute to
appropriate financial oversight. This is not the sole remit of
the treasurer, nor can this responsibility be outsourced to
an organisation’s accountants or external advisers.
The board should work with management to determine
how best to communicate information about the
organisation’s financial position. Information produced for
this purpose is referred to as ‘management accounts.’
Management accounts usually include the following three
types of financial statements:
Figure 5: Types of financial statements
The numbers in these statements are intrinsically linked.
Organisations can make use of accounting software that
links the data in these statements to provide greater
integrity in financial reporting, but directors should
carefully review whether these statements are correct.
Where a financial report is presented to
members and other stakeholders, laws
and regulations may require them to be
presented in accordance with Australian
Together, these three financial reports present the
overall picture of the organisation’s financial health at
a point in time.
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Evaluating the organisation’s financial health is an
important part of the role of the board.
In doing so, the board must identify what the financial
goals of the organisation are. This includes determining
matters such as the required level of reserves, an
appropriate diversity of revenue streams and the right
asset mix to maintain. Boards will generally look closely at
their budget, management accounts and financial reports to
evaluate performance against these goals.
There are several standard indicators that organisations can
use to assess financial performance:
Figure 6: Examples of financial performance measures
There is a perception among some NFPs that they should not
set and achieve ambitious profit goals because this may be
viewed poorly by stakeholders. However, aiming to achieve
long-term financial sustainability should be a core goal of all
organisations so that they can achieve their purpose now and
into the future. This involves making smart financial decisions
and aiming not only to get by, but to build and maintain
Being an NFP does not mean that you
cannot make a profit (sometimes called a
‘surplus’). NFPs can make a profit provided
it is used to further its purpose.
While it is important to plan for financial strength, NFPs
should not pursue profit at the expense of delivering their
purpose or be perceived to be doing so by stakeholders.
Boards play an important role in determining a financial vision
for the organisation and communicating it to stakeholders.
For example, if an NFP is seeking donations while at
the same time making a large profit so that it can pay
for a new piece of equipment, it is important that this
is understood by stakeholders. The board should make
sure that the intention of their financial decisions is
communicated to members so that they can understand how
the organisation’s resources are being used to further the
“Profit is not a dirty word.”
Susan Pascoe AM FAICD
This also applies to an organisation’s reserves. Having
adequate reserves is important to support financial
health and can play an important role in managing risk.
Determining the right level of reserves is a matter for the
board and should include consideration of the organisation’s
operational context (such as its operations, staffing, funding
landscape, liabilities and the external market) to help assess
current and future financial needs.
It is important that the board takes a considered approach to
the management of its reserves. It is a good idea to develop
a policy that sets out the board’s intentions around the
maintenance and use of reserves. This policy can also help
the board to communicate with stakeholders about how
they are managing the organisation’s financial resources.
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Solvency refers to an organisation’s ability to pay its debts
as and when they are due. This means that an organisation
must have access to enough cash (or assets that can be
quickly converted to cash) to pay for any debts it may have.
Monitoring solvency is a key responsibility of each director.
One of the ways a board can do this is by monitoring the
organisation’s cash flow. If more money is consistently
going out than is coming in, this may be an indication that
the organisation is heading towards insolvency. Estimating
future cash flow needs and monitoring the working
capital ratio (which shows the relative proportion of the
organisation’s current assets to its current liabilities) can
also provide insight into an organisation’s solvency. It is
generally considered good practice for an NFP to have a
working capital ratio of 1.5 or greater, meaning that current
assets should be 1.5 times greater than current liabilities.
Where this is not the case, this should be prompt inquries
Most organisations will be subject to legal
requirements about being and remaining
solvent. Directors may be personally liable
for any debts incurred if an organisation
continues to trade after it becomes insolvent.
Faced with the prospect of insolvency, many boards choose
to shut up shop and call in an administrator or liquidator.
However, directors may be able to rely on a ‘safe harbour’
defence if they begin a course of action that is reasonably
likely to lead to a better outcome for the organisation than
the appointment of an administrator or liquidator.
Insolvency is a complex and serious issue, and directors
should take swift action if they are concerned that the
organisation is, or may become, insolvent. Often this will
include seeking expert, professional advice.
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The performance of an NFP should not be evaluated in
financial terms alone. To build a complete picture of an
NFP’s performance, it is also important to use non-financial
For example, an organisation established with the purpose
of providing high-quality care and accommodation to
older Australians cannot know whether it is achieving its
purpose solely by looking at its profit for the year. It will
be relevant to evaluate factors such as standards of clinical
care and the health and wellbeing outcomes of clients.
These are called non-financial performance measures.
There are several standard indicators that organisations can
use to assess non-financial performance:
Figure 7: Examples of non-financial performance
Efficiency measures demonstrate how well an organisation
turns its inputs (e.g. financial resources) into outputs (e.g.
meals). For example, a soup kitchen can determine the
efficiency of its operations by calculating the number of
meals it provides and the total cost of providing them to
work out the cost of each meal.
Effectiveness measures demonstrate how well an
organisation is achieving its objectives. These measures can
be more difficult to determine because they are generally
not as easy to quantify and may involve more subjective
judgement. For example, a school might evaluate its
effectiveness based on how well students perform against
standardised tests. These measures are sometimes referred
to as ‘outcomes measures.’
In selecting non-financial performance measures, it
is a good idea to consider a balance of efficiency and
effectiveness measures to establish a more complete picture
Some organisations may have legal or
contractual obligations to report on certain
measures as part of funding, contractual,
regulatory or accreditation requirements.
It is also important for organisations to assess how well
they are performing against the expectations for their
conduct (or behaviour) set by themselves and others such
as government authorities, accreditation bodies and selfregulatory agencies. This is discussed in greater detail in
Principle 9: Conduct and compliance.
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All NFPs exist for a purpose, but it can be challenging to
evaluate precisely how well an NFP is working towards
achieving its purpose. Some NFPs will have a purpose that
is very difficult to evaluate such as eradicating poverty, or
which may be ongoing such as cancer research.
Impact measurement refers to the process of evaluating
how much change an organisation has achieved through
its activities. For example, an organisation that provides
employment services to deaf people might measure impact
based on factors such as the workforce participation of
their clients. To do this, an organisation might compare
their clients against the broader workforce, against a
control group of deaf people who are not their clients, or
against the impact of their competitors.
Measuring impact is challenging and may require
significant resources to do effectively. However, if possible,
impact measurement is a valuable way to demonstrate an
organisation’s success in achieving their purpose, and can
be useful in attracting donations and funding.
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Reporting to the board
For the board to monitor the organisation’s performance,
and to make decisions that will help drive performance,
they must have access to timely and relevant information.
The main way this is achieved is through reporting to the
board. Reports received by the board should be aligned
to the strategy and include consideration of any defined
The nature of this reporting will depend on the
organisation’s circumstances. The board should work with
management to establish a reporting framework that
provides access to the information they need, when they
need it and in an appropriate format.
While it is important this information is provided to the
board, directors should also actively seek more information
if required as part of their duty of care and diligence. This
is discussed in greater detail in Principle 2: Roles and responsibilities.
"Measuring impact is challenging
and may require significant
resources to do effectively. However,
if possible, impact measurement is
a valuable way to demonstrate an
organisation’s success in achieving
their purpose and can be useful in
attracting donations and funding.”
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Questions for Directors
- Is the board satisfied that the organisation's resources are protected from misuse?
- Is there an agreed definition of success for this organisation?
- How well is financial and non-financial performance evaluated?
- Do financial performance targets contribute to long-term organisational sustainability?
- How does the board use performance information in its decision making?
HelpfulCare has established a resource management
framework that sets out how the organisation’s
resources are to be used. As part of this they have
developed specific policies around matters such as
vehicle maintenance and acceptable use of technology
The board undertakes an annual budgeting process
which sets ambitious targets for profit and growth.
HelpfulCare uses a zero-based budgeting model through
which all expenses are justified for each new period and
a revised budget is developed at the half-year mark in
response to changes in the operational environment.
As part of their strategic plan, HelpfulCare have
identified five key strategic goals which are supported
by a series of measures. The board receives regular
reports from management on the organisation’s
performance against these measures.
The board also receives regular financial reports which
help them to monitor and reach an informed opinion
on the organisation’s financial health – including its
solvency. Financial reports are prepared by management
and reviewed by the board.
The board sets short, medium and long-term objectives
for the CEO which are defined in an annual performance
agreement. The CEO receives an annual appraisal as part
of a process lead by the chair and reports at quarterly
intervals to the board against defined criteria.
The Friendlies maintain an annual budget which is
developed by the board with the assistance of the
coordinator. The budget remains
substantively the same each year but is adjusted
based on new membership figures or to accommodate
Within the budget, only the coordinator is authorised
to spend money on behalf of the Friendlies. For
expenditure outside the approved budget or above a
certain amount, the coordinator is required to seek
the authority of the board.
The Friendlies have a five-year strategic plan which
includes key targets towards which the organisation
is working including growing their membership
and saving money for community projects. Reports
against these targets are provided by the coordinator
at all board meetings. The board also reviews
standard management accounts produced by the
Friendlies’ accounting software to consider how they
are performing against their budget and to monitor
The coordinator’s goals are the same as the
organisation’s strategic objectives. Every year the
chair and two board members meet to review the
coordinator’s performance and to provide feedback.