What Every Board Member Should Know About Nonprofit Financial Statements

By Doris Fee, President, Blue Ridge Business Consultants

So now you’re on the Board!  You’ve been elected to represent the interests of the members of your organization at the Board level.  Your understanding of the financial operations of the organization is critical, especially given the increased public scrutiny of nonprofit organizations.  As a board member, you have a fiduciary responsibility to ensure that the organization has adequate financial resources to carry out its mission and that sound financial policies and procedures are in place.  Fiduciary responsibilities include:

  • making sound, prudent business decisions,
  • reviewing and approving the annual budget,
  • reviewing timely financial reports,
  • developing financial policies and procedures,
  • ensuring adequate controls exist to protect the organizations assets,
  • ensuring the organization has sufficient resources to carry out its mission,
  • meeting with the auditors to review the annual audit and management letter, and
  • reviewing the IRS Form 990 Information Return.

 

Financial Statements

                Financial statements report the financial activities of the organization.  All financial statements prepared by the organization should be accurate, easy to understand and produced in a timely, consistent manner.  Financial reports typically include the Statement of Financial Position (formerly the balance sheet), Statement of Activities (formerly the income statement), Statement of Cash Flows and any other supporting statements unique to the organization.   Statements may be prepared using the cash or accrual method of accounting.  The cash method of accounting only reports revenue and expenditures as they actually occur.  The accrual method of accounting, the preferred method of recording financial activities, matches revenue and expenditures to the time period when they will occur.

                The Statement of Financial Position lists the assets, liabilities and net assets as of a specific date and provides a snapshot of the financial health or solvency of the organization.  Balances are perpetual, representing the results of operations since inception.  On the other hand, the Statement of Activities reports results of operations for one fiscal year.  This statement is more useful if it also contains prior year balances to determine whether the assets, liabilities or net assets are increasing or decreasing over time.

Assets represent everything of value the organization owns.  Current assets are any assets that may be turned into cash within a twelve month period and include cash and other short-term investments.  Other current assets typically include accounts receivable, which are monies owed to the organization, and prepaid expenses.  Fixed assets include any land, buildings, equipment and furniture owned by the organization.  Fixed assets are listed at the purchase price and are depreciated annually with the exception of land.  Depreciation is a noncash expense which is used to record the wearing out of fixed assets over time. 

Liabilities represent everything the organization owes and Net Assets represent the net value or worth of the organization.  (In a for-profit entity this would be listed as Stockholder’s Equity.)  Current liabilities are any liabilities that must be paid within a twelve month period and includes accounts payable, payroll related items and deferred revenue.  Deferred revenue is revenue received prior to a program or services being provided. Long-term liabilities are any liabilities due beyond a twelve month period, such as loans or mortgages payable.  When reviewing this statement, ask these questions:  Is sufficient cash available to support the operations of the organization?  Do current assets exceed current liabilities?  Are accounts receivable balances increasing?  Is the organization laden with debt?  Does the organization have a positive or negative net asset balance?

The Statement of Financial Activities lists the revenue and expenditures for a specific period of time, which should be noted on the top of the statement.  Revenue and expenditures are typically reported by natural account.  On the financial statement the natural accounts are listed, i.e. salaries, printing, postage, utilities, etc. along with their respective balances.  Revenue and expenditures may also be reported by program.  This statement should include columns for the year-to-date actual, year-to-date budget, variance of actual to budget, and annual budget figures.  Review this statement to determine if revenue goals are being met, if expenses are in-line with budget projections, and if the organization is generating an addition to net assets (formerly net income).  Ask for an explanation of any large variances between the actual year-to-date and budgeted year-to-date figures.

By being diligent in the analysis of the financial reports and asking the right questions, you are carrying out your fiduciary responsibilities as a board member.

Doris Fee, CAE, president of Blue Ridge Business Consultants, provides training for board members and helps organizations improve their financial operations.  Contact:  dorisfee@earthlink.net, www.blueridgebuscons.com