How a Nonprofit Board Uses Financial Statements

For many nonprofit leaders, creating financial statements each month is an arduous task. While there is tremendous value in standard financial statements, sometime the information is not presented in a way that tells the full story of the organization’s financial health.

Upon receiving monthly financials, oftentimes, the Board of Directors or Finance Committee have follow-up questions. The need for supplemental facts and figures adds stress to Executive Directors, staff and volunteers who don’t have the expertise to fully answer those inquiries or provide the essential materials.

It’s worth taking the time to have a conversation with your Board or Finance Committee to get a clear understanding of what financial information they need.  Sometimes these are difficult questions for a Board to answer. A better question is to ask what decisions need to be made using the reports you provide.

Once you have clear understanding of your Board’s motives, you can design your monthly financial reporting package to deliver the targeted information that matters most. This will save time and reduce stress for all parties in your organization. It’s all a matter of knowing your audience.

Generally speaking, your Board is most likely concerned about these key areas:

• • Assuring your donors that their funds are being used in fiscally responsible way
  • Resources are utilized in ways that best further the organization’s mission
  • Restricted assets are used only for their intended purpose
  • There is cash available to fund initiatives and administrative expense

Let’s take a look at the standard financial reports nonprofits produce and how they address concerns and provide assurances for your Board.

Statement of Financial Position (aka Balance Sheet)

It’s important that net assets are properly recorded as either restricted or unrestricted. The Statement of Financial Position tells you and your Board how much restricted and unrestricted assets are available for use.

Restricted funds should be kept in separate bank accounts so that they are not commingled with funds intended for other restricted purposes or for administrative expenses.

By analyzing the asset section of the report, you can see what other assets the organization has that could be used to generate cash if needed. For example, investments could be liquidated and transferred to operating accounts to fund various expenses.

Accounts receivable and accounts payable aging summaries can be helpful supporting schedules when your Board wants to know the expected timing of collections and disbursements. Further analysis of those balances and the timing of receipts or payments are presented in a more meaningful way on the Cash Flow Forecast, which we’ll talk more about below.

Statement of Activities (aka Income Statement)

This report is the starting point for the Board to make strategic financial decisions. Your Board will likely want to see actual income and expenses compared to budget and also by program.

Revenue and expenses compared to budget will tell the Board how the organization is actually performing versus the original plan.

You can help your Board by highlighting revenue sources that are lagging behind the budget. Recommend ways to increase funding for programs. Suggest fundraising opportunities. Identify issues that prevent the collection of donor commitments or fundraising activities.

You can also highlight non-budgeted expense items. Explain why they were necessary and if they are expected to continue. Suggest opportunities to reduce or eliminate expenses where possible. 

Statement of Functional Expenses

This report expands upon the summary of expenses shown in the Statement of Activities.

• • Here, a detailed breakdown of expenses by program, fundraising and administration highlights expense areas to re-evaluate.
  • Calculating program expenses, administrative expenses, and fundraising expenses as a percent of total expenses can be very helpful to your Board.

Statement of Cash Flow

This report looks at cash inflows and outflows historically. It explains how cash was utilized over the past month.

If there has been a significant increase or decrease in operating cash balances, this report tells the story of what caused the change.

Projected Cash Flow

Cash flow projections, in conjunction with the budget, give the Board foresight of future cash availability. Projections incorporate accounts receivable and accounts payable amounts as well as debt obligations.

• • Future shortages can be spotted before they become a crisis and while it’s still possible to change course or reallocate funds where necessary.
  • Projections might reveal that certain programs should be discontinued.
  • On the other hand, you might discover a future excess of cash will occur. This gives the Board the opportunity to increase reserves or spearhead new programs and services.

In summary, if you can understand the needs of your Board and anticipate their questions, you will have a good chance of delivering financial information in a targeted way that meets their needs and reduces follow-up questions and rework.

If you have additional questions about financial reporting or other challenges in your organization, please let us know how we can help.