Financial management and informative reporting for the non-accountant. Do financial statements make you feel like…
You’re not alone. Those pesky statements are actually your good friends though and sometimes you just need to befriend them a little. Surprisingly, understanding your organization’s financial statements has much in common with your budget at home – money comes in, money goes out, and hopefully there’s some left at the end! Right?! Being involved with a nonprofit, particularly as a board member, means that you have some legal duties and responsibilities. Although the day-to-day finances is the job of management, the board of directors has ultimate responsibility for the financial oversight of the organization including:
-
Regularly evaluating the organization’s financial health
-
Establishing & ensuring the organization’s compliance with proper systems & controls
-
Ensuring the organization is on a financially sustainable path
Not every board member needs to be a financial whiz, but each board should include some members with financial or business experience. As well, all board members need to possess enough financial literacy to read and evaluate financial statements, and ask the right questions to determine that the organization is in good financial health. This is the duty of the Board so it’s not a time to sit quietly if you don’t understand something – you need to ask!
The statements that are produced at year end by the accountant or auditors are full reports that follow the requirements of CRA for filing purposes – they are not easy to follow nor do they work well for proper monthly management reporting.
Work with your bookkeeper or accountant and discuss the different ways the information can be presented. This will make a big difference in ease of understanding and your ability to use the information successfully.
Some typical views that are helpful are:
-
Actual – monthly, year to date, specific period
-
Budget – monthly, year to date, specific period
-
Actual vs Budget for whatever periods or comparisons you want
-
Historical comparison, this year vs last year
-
And / or a combination of all of the above
Comparisons are key as you will not only know where you currently are, but you will be able to determine trends and make the appropriate well informed decisions.
There are two primary financial reports/statements with a third that is very noteworthy. 1. Statement of Financial Operations: This indicates the organization’s revenue and expenses for a specific period of time. i.e. January 1 to March 31, 2020 and contains two main sections:
-
Revenue – items included in the organizations sources of income such as grants, donations, fees charged
-
Expenses – items indicate the costs of running the organization such as rent, salaries, office supplies
Taking the organization’s revenue and subtracting the expenses indicates the surplus or (loss) 2. Statement of Financial Position: This indicates the organization’s financial position on a stated date. i.e. At March 31, 2020 and contains three main sections:
-
Liabilities (what the organization owes), often divided into current and long term assets
-
Assets (what the organization owns), usually divided into current and fixed assets
-
Net Assets (What the organization is worth), often considered restricted or unrestricted
3. Cash Flow Statement which shows you what the actual cash position is – your ability to meet financial obligations in a timely manner. There you have it – three types of financial statements that you need to befriend (even a little). Through them, you will be provided with the information you need to make those important decisions to help with your organization’s financial sustainability. And remember, ASK QUESTIONS! It’s your duty.
Talk soon,
Frank
