A core responsibility of directors and trustees is overseeing their organisation’s compliance with regulations. This requires them to be alert to both changes in regulations and to the impact that the current operating environment might have on their organisation’s ability to comply.
A key priority is ensuring that the organisation is, and will remain, able to pay its liabilities when they are due. Directors and trustees must review financial reports regularly, including the profit and loss statement, the balance sheet and the statement of cash flows. Forecasted results – for a minimum of 18 months – should be considered, and the information compared against prior years’ results and the budget.
They should ask questions to understand why actual results have varied from planned results and be aware of unpaid liabilities (including tax), customers/clients overdue with their payments and the reasons for bad debts. They should consider liquidity ratios such as the quick ratio which measures an organisation’s ability to meet short term financial obligations. This is calculated by dividing the sum of cash, marketable securities and accounts receivable by current liabilities and ideally should be greater than 1.
In addition to maintaining solvency, directors and trustees are responsible for the financial reports including their accuracy, accounting treatments, policies employed, significant judgments, the information disclosed and the external audit (if required). They should approve operating budgets, capital expenditure, distributions to stakeholders and debt arrangements.
Directors and trustees should be curious and seek professional advice if unsure about what the financial reports are telling them.
This article was first published in the Mercury Bay Informer of 1 March 2022.
