What do you do with your financial statements, once you have posted them on your website as a show of your nonprofit’s transparency? Financial statements are jam-packed with important information about your organization. So make sure you understand and use them.
A history of your financial past
Think of audited financial statements as a family album, providing a history of your nonprofit’s financial past. Examining that past can help you better manage your organization now and in the months and years ahead.
To glean meaningful insights from these documents, you need to understand what each statement represents. Take it a step further, and you (or the board members) can use the data to create a trend analysis, an industry comparison or a projection of upcoming challenges. Such tools can springboard your organization to making better-informed decisions.
Each statement’s “reason for being”
Being able to use the information in basic financial statements to strategize for your organization starts with understanding the statements’ purpose and components:
Your nonprofit’s Statement of Financial Position lists its assets (what you own), liabilities (what you owe) and net assets (assets the organization has after all liabilities are paid). It’s a snapshot of your nonprofit’s financial health on a given date — usually the end of a month, quarter or year.
The Statement of Activities details the revenue and support your organization is bringing in and the expenses it’s incurring for a time period ending on a specific date: for example, “the year ending Dec. 31, 2013.” This is also the date of the statement of financial position. The statement of activities typically summarizes funds coming in by type of revenue and support, such as fees and service contracts, grants and contributions, and investment income. The statement also summarizes expenses — typically under the categories of programs, management and general, and fundraising.
The Statement of Functional Expenses displays a chart of expenses for the same period as the statement of activities, listing expenses in classifications down the page, such as salaries, rent and professional fees. Columns across the page — typically program, management and general, fundraising and total — group each expense into the function that received the benefit of the expense.
The Statement of Cash Flows presents the impact of the nonprofit’s activities on cash for the same period as that of the statements of activities and functional expenses. It segments cash coming in and going out into operating, investing and financing categories.
Last, there are the notes to the financial statements. These remarks explain the nonprofit’s accounting policies and information about certain balances presented in the statements. Details on the activity in endowment funds and information on temporarily restricted net assets are, for example, given in the footnotes. They also include details about summarized line items, such as the allowance or discount included in long-term pledges receivable.
Comparison with your budget
It’s critical that your nonprofit perform monthly comparisons of the organization’s financial results to its corresponding budget. Most financial software programs allow the budget to be entered per month and produce statements that compare actual results to what was budgeted.
Make it a policy to investigate any variances greater than a certain dollar amount or percentage. A smaller organization might, for instance, base the dollar amount on the amount used in its check-signing policy. A percentage of 5% to 10% variance is often used as the rule of thumb. This allows you to properly oversee and assess operations in a timely way, and evaluate the performance of individual programs and departments.
Planning for the future
Planning for the near future is critical in today’s lean economy. You can compare actual monthly results through the most recent month, and add future budgeted monthly amounts to prepare a forecast of the full-year results. This “best guess” of what will happen to the organization in financial terms over a given period of time may indicate the need to find more revenue and support and cut back spending. Or you may find just enough resources to buy new technology. Basically, the comparison will indicate whether you’re on track with your original budget or if it should be revised.
A similar model can be used to prepare a cash-flow projection. This is useful for nonprofits with cyclical cash needs during the year. The projection can help you plan properly and make good investment decisions. If it shows you have excess cash in December, for example, but will need to use the cash in May, invest the cash in such a way that it can be available at the later time.
A barometer on how you’re doing
Financial information should be used to evaluate the organization’s effectiveness in meeting its mission. Monitoring program information from detailed financial records can help determine whether you’re accomplishing specific goals.
If your current year’s objective is to increase membership from 1,500 to 1,800, for example, examine the total membership fees collected and monitor the progress toward your goal. If you need $2 million to build your new facility, use the monthly statement of activities to monitor pledges and develop a detailed listing of pledges receivable to monitor donor payments.
A tool for your future
Comparing your annual results with those of other nonprofits in your industry — or benchmarking against industry statistics — can help identify your organization’s strengths or weaknesses. And this can lead to spotting growth opportunities or reallocating resources. Apply these same ratios over several years and you’ll have the basis for long-range strategic planning and better use of money and resources.
Don’t let it go to waste
Your organization’s accounting staff, management and leaders have put in countless hours recording data for your financial statements and checking their accuracy. Make sure you put this information to good use as you plan your nonprofit’s future.