How often do your not-for-profit board members ask a question regarding the organization’s financial statements? If your board is like most, questions about financial statements may be few and far between. Although a not-for-profit’s board serves a variety of functions, including strategic planning and direction, one of the most important functions is financial oversight and fiduciary responsibility. Not-for-profit board members often come from a variety of backgrounds, but each member should also be knowledgeable about the organization’s financial statements.
When communicating financial information to board members, it is important to maintain a balance between information that is comprehensive, yet concise. One way to introduce new board members to your not-for-profit’s vision is to use a board orientation. This is an easy way to show them the culture and engage them in shared leadership for the organization. Consider reviewing the organization’s financials and discussing these top five areas in your board orientation:
1. Statement of Financial Position
The Statement of Financial Position is also known as a Balance Sheet. The title is specific to not-for-profit organizations. This statement is a snapshot of balances at a specific period in time. Balances consist of assets (what you own) less the organization’s liabilities (what you owe). The difference between these balances is net assets. Net asset balances should typically show positive balances. Consider in your discussion what types of assets or liabilities make up the majority of these balances. Does the organization have a large investment account or does the organization maintain higher levels of debt?
2. Statement of Activities
The Statement of Activities is known as an Income Statement. This statement is more of a report card for the organization showing how the organization performed over a period of time. One of the highlights of this statement is net income. Net Income shows the organizations total revenues less total expenses for the period. Although it may be surprising to some, most not-for-profits actually want to make an income. Unlike for-profit companies, this net income is reinvested in the not-for-profit for future purposes. Net income, although not the only deciding factor, can be helpful in facilitating discussion regarding the growth and sustainability of the organization. Oftentimes, organizations will compare net income amounts to the prior year or to budgeted amounts.
3. Statement of Cash Flows
Most not-for-profits report on the accrual basis of accounting which helps to compare amounts consistently from year to year. This statement shows how much cash the organization received during the year, less amounts paid out, or payments for other purchases including equipment or investments. Often, a common question from board members is why cash balances didn’t increase by the same amount as the net income. This statement can aid in that discussion. Perhaps the organization purchased a large amount of equipment or prepaid several expenses for next year.
4. Functional Expenses
In not-for-profits, expenses are separated into the three main functions: program, management and general, and fundraising. Additionally, expenses are also classified by nature such as wages and benefits, supplies, travel, etc. This breakout can be useful to determine what programs or areas use the most resources.
Liquidity is now required to be described in the notes to the financial statements under the new not-for-profit accounting standards. Liquidity describes how much cash, investments, or other liquid resources the organization maintains to meet future expenses. Some may refer this to a “rainy day fund”. Often times, a specific goal is set as part of the strategic plan to maintain balances to cover a certain amount of future expenses. This can be especially important for not-for-profits with inconsistent revenues.
Remember that these five areas are just a starting point for discussing financials and may lead to deeper conversations. Make sure you and your board are asking questions to better understand what is being presented.
For additional information about HBE’s Not-for-Profit services, including our board training resources, please contact our office at (402) 423-4343.