Many not-for-profit organizations we work with require a set of financial statements at the end of every month, including a statement of financial position, statement of operations, and statement of cash flow.
These financial reports are reviewed closely by the board of directors and senior management to develop an understanding of the organization’s ability to steward and manage resources provided by donors. They can also help the management team assess how its strategy manifests with user and stakeholder groups and assist board members in assessing risk areas and identifying opportunities.
Having worked with various not-for-profit organizations over the years, we've found that many board members and non-financial senior managers often find it challenging to translate the information in these statements into a clear picture of an organization’s performance and operational story. Below is a list of some considerations to note when reviewing financial statements.
Statement of Financial Position
The statement of financial position, often referred to as the balance sheet, is a report that outlines an organization's assets, liabilities, and net assets on a given date. A balance sheet is crucial for a nonprofit organization because it provides a snapshot of its financial health by detailing its assets, liabilities, and net assets at a specific point in time. This information helps stakeholders understand the organization's ability to sustain operations, fulfill its mission, and manage resources effectively. Additionally, it supports transparency and accountability to donors, grantors, and regulatory bodies.
Cash Position: Is adequate cash on hand (i.e., available and not invested or subject to letters of credit or similar) to ensure the organization's day-to-day and long-term objectives can be met?
Accounts Receivable: Are there balances due from contributors and customers that have been outstanding for a significant amount of time?
Investments: Are the investments aligned with the organization’s investment policy? For example, if the organization’s investment policy includes an ethical investing provision, are any investments held that are not in line with those requirements?
Capital Assets: Are any of the organization’s capital assets fully amortized? This could suggest capital purchases will soon need to be budgeted for.
Liabilities - Are there roughly enough current assets (Cash, Accounts receivable, Short-term investments) to offset the current liabilities (Accounts payable, Accrued liabilities)?
Net Assets: Is the organization's ending net asset position positive? If the organization uses the restricted fund method, is the ending net asset position positive for each fund?
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Statement of Operations
Like an income statement, the statement of operations outlines the organization's contributions and other income and expenses for a given period. An income statement or statement of operations is important for a non-profit because it provides a detailed account of the organization's revenues and expenses over a specific period, ensuring transparency and accountability to donors, regulators, and stakeholders. This financial report helps the non-profit assess its financial performance, manage resources effectively, and ensure that funds are allocated in alignment with its mission.
Contributions: Are the actual contributions consistent with the budget? What is the trend of the last three years of contributions?
Investment Income: What is the return on investment assets? Is the return consistent with the market performance for similar investments? If not, further information should be obtained to ensure effective management of the organization’s funds.
Administrative expenses: Is the cost structure in line with the budget? How do the administrative expenses compare with those of prior years?
Does the statement clearly communicate the organization's activities over the period? Keep in mind that there is flexibility in how the statement presents the financial information.
Statement of Cash Flows
The statement of cash flows offers insight into the generation and use of cash in an organization. These statements are often used for budgeting and business planning, showcasing an organization’s operating, investing, and financing activities. The cash flow statement presents the overall change in the organization’s cash for the period the statement was prepared.
Cash Flows from Operations: Did the organization generate positive cash from its operations? If not, is it a one-time issue, or is a trend starting to develop?
Cash Flows from Investments: Was the purchase and redemption of investments consistent with the organization's investment policy and strategy? Was there a significant redemption that was not reinvested?
Cash Flows from Financing: Does the organization hold debt? Are debt payments consistent with the budget and supportable going forward with the current cash management strategy?
Financial statements can effectively present a picture of an organization’s operations. By taking the time to understand the information within financial statements, board members and senior management can better assess the organization’s current financial position and results, allowing for more informed decision-making and long-term success.
In a concise format, here are some tips for getting through the financial statements. Start by examining the Statement of Operations to understand the organization's revenue sources and expenses, ensuring that funds are utilized effectively toward its mission. Review the Statement of Financial Position to assess assets, liabilities, and net assets, paying close attention to the classifications of net assets with and without donor restrictions to comprehend resource availability. Evaluate the Statement of Cash Flows to analyze the organization's liquidity and financial sustainability over time. Read the notes accompanying the financial statements for detailed explanations of accounting policies, commitments, and contingencies that impact financial health. Lastly, compare financial data across several periods to identify trends and assess the non-profit's ongoing financial performance.
Enkel offers a range of bookkeeping services for not-for-profit organizations, including day-to-day bookkeeping tasks, payroll and accounts payable management, budgeting and other services. Get in touch today to see how our team can help!
