Page 36 - C&A's Nonprofit Board Guide

UNDERSTANDING FINANCIAL REPORTING FOR A BOARD MEMBER UNDERSTANDING FINANCIAL REPORTING FOR A BOARD MEMBER

► Program trend analysis will be unique
LIQUIDITY – from agency to agency, depending on the
The statement of functional expenses reports SHOWS THE ORGANIZATION’S organizations’ operations and funding sources.
Some examples include:
the natural classification of the expenses (e.g. ABILITY TO MEET ITS FINANCIAL NEEDS IN
payroll, fringes, rent, etc.) that were spent THE NEXT FISCAL YEAR: TREND IN NET ASSETS: ∆ Total program revenues less expenses (this
on the organization’s programs, general and ► Is measured by working capital (current could be in total or by funding source).
administration, and fundraising activities. assets less current liabilities) and current ratio ► A Board member would want to see the ∆ Sources of revenue (what percentage of
Many donors focus on this schedule, because (current assets divided by current liabilities). organization’s net assets increase over time, an organization’s revenue is coming from
they are interested to see what percentage of You want to have at least positive working or at least remain fairly consistent. A steady each revenue stream) help to identify
an organization’s expenditures are spent by capital. or continuous increase in net assets means concentrations in revenue.
the organization in a program service capacity the organization is operating efficiently (i.e.
(program service percentage). ► It measures the ability of an organization to programs are appropriately run and expenses ∆ Revenue and/or expense per unit of service.
meet its current obligations with the current are controlled). Growth in net assets typically Trends in units of service (important for fee-
The statement of cash flows reconciles the assets it has available. Banks like to see a means better cash flows and better liquidity. ∆ based revenue streams).
beginning of the year cash balance to the end current ratio of approximately 1.5 to 1.
of the year cash balance. The cash activity is EXPENDABLE NET ASSETS: FUNDRAISING EVENT PROFITABILITY:
separated by three types of activities: operating, DAYS IN CASH: ►
investing, and financing. The statement of cash ► The number of days the organization can It’s important when looking at an organization’s ► The profitability of an organization’s
flows combines the statement of financial position operate with its cash balance (as of the net assets that you also understand if those net fundraising event(s) is measured by the total
and the statement of activities to help you to better statement of financial position date) without assets are available for use by the organization. revenue raised from the event less the total
understand the sources and uses of cash within an bringing in any additional resources. Too often, organizations have significant expenses associated with the event. This
organization. levels of net assets, but they are still having measurement can assist in determining if
► Depending on how an organization is funded, difficulty meeting their day-to-day obligations. an event is worth continuing or should be
FOOTNOTE DISCLOSURES: an appropriate days in cash figure could range Expendable net assets take an organization’s modified to potentially generate more income.
from 45 days (organization with a consistent net assets, removes long-term assets (e.g. A good rule of thumb is you would like your
monthly funding stream) to as much as a property and equipment, security deposits, events to generate at least three times the
► The footnotes disclose information about year (an organization with one big annual restricted resources), and adds back debt related expenses.
the organization, its programs, significant fundraising event or appeal). Understanding related to the removed assets. This will really
accounting policies, detailed information on days in cash can provide a quick insight into hone in on the level of expendable or usable PROGRAM SERVICE PERCENTAGE:
significant accounts, and commitments and whether or not an organization is having, or is net assets the organization really has. After all,
contingencies. The footnotes are an important going to have, cash flow issues. you can’t pay your staff with bricks from your ► This represents the percentage of every dollar
aspect of the financial statements as they add a building. that is spent on running the organization’s
better understanding as to the detail behind the DAYS IN ACCOUNTS RECEIVABLE: programs. The higher the percentage, the
numbers on the statements. PROGRAM TREND ANALYSIS: more dollars targeted to program activities.
► The number of days it takes an organization The nature, size, and funding sources of your
In addition to the information presented on the to collect on its receivables. Depending on the ► A significant measurement of an organization organization will all impact your program
financial statements, Board members should type of funding an organization receives, a operating effectiveness is based on the success service percentage. Larger organizations,
be familiar with certain key benchmarks, trend Board member would want to see the number of its programs. It’s important to see if a government funded organizations, and health
analyses, and ratios that will help them to better of days to be no more than 45 and to see the program is profitable, break-even (i.e. deficit- and welfare organizations all tend to have
understand the meaning and impact of many of days decrease over time, or at least remain funded, where the organization is reimbursed higher program service percentages.
the numbers on the financial statements. This consistent. Days in accounts receivable are for the expenses already paid to run the
information is often looked at by funders, banks, typically more relevant for organizations that program), or operating at a loss. By having a better understanding of your
and other users of the financial statements to assess rely on regular revenue streams (such as fees organization’s finances, by being more engaged
the organization’s fiscal health. If these ratios for service or regular government vouchers) in financial discussions and by understanding
are not strong, it could impact an organization’s than those that are more fundraising-driven. the impact of the financial information, you can
ability to obtain funding. The most common trend If an organization’s days in receivables are identify concerns or opportunities early on. This
analyses and ratios include the following: greater than its days in cash, the organization will put you in a better position to help steer the
may have cash flow issues if a line of credit is organization forward and ensure that it is able to
not in place. maximize its organizational impact.

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