Reading Financial Statements


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Reading Financial Statements

  1. 1. Reading Financial Statements and Audits American Legion Auxiliary – October 3, 2005
  2. 2. Why do I need to know this stuff? <ul><li>Board members are responsible for the organization survival, financial viability, and program success. </li></ul><ul><li>Who are members of your nonprofit Board? </li></ul>
  3. 3. Financial Responsibilities of the Nonprofit Board <ul><li>Fiduciary …. A trust held for the greater community. Custodians of something of value to the community. </li></ul>
  4. 4. Financial Issues Board Members Should Address <ul><li>Financial Planning </li></ul><ul><ul><li>evaluation of existing & potential resources </li></ul></ul><ul><ul><li>examination of internal & external forces affecting the organization & funding </li></ul></ul><ul><ul><li>examination of alternatives & their financial implications </li></ul></ul>
  5. 5. Financial Issues Board Members Should Address <ul><li>Sufficient Available Cash </li></ul><ul><ul><li>Monthly cash projections to determine if there is adequate cash to cover expenses for the next month. </li></ul></ul><ul><ul><li>Annually the budget should outline on a monthly basis the anticipated needed cash. </li></ul></ul>
  6. 6. Financial Issues Board Members Should Address <ul><li>Satisfactory Reserves </li></ul><ul><ul><li>Most experts recommend one year of operating expenses. </li></ul></ul>
  7. 7. Financial Issues Board Members Should Address <ul><li>Relationship Between Revenue and Expenses </li></ul><ul><ul><li>More revenue (income) than expenses… that’s a good thing!! </li></ul></ul><ul><ul><li>More expenses than revenue…. could be a bad thing, if you are using a significant amount of reserves… or have no reserves!! </li></ul></ul>
  8. 8. Financial Issues Board Members Should Address <ul><li>Meeting the Budget </li></ul><ul><ul><li>Quarterly, at a minimum, the planned budget needs to be compared against the actual income and expenses. </li></ul></ul><ul><ul><li>Address differences to ensure procedures are in place to improve planning and correct where necessary. </li></ul></ul>
  9. 9. Financial Issues Board Members Should Address <ul><li>Propriety of Expenditures </li></ul><ul><ul><li>Provide oversight to safeguard against waste and fraud. </li></ul></ul><ul><ul><li>Provide oversight of contractual agreements to ensure organization’s exempt status. </li></ul></ul><ul><ul><li>Ensure internal control procedures in place and followed. </li></ul></ul>
  10. 10. Financial Issues Board Members Should Address <ul><li>Insuring Against Risks </li></ul><ul><ul><li>Is everyone who handles cash, checks, or investments bonded? </li></ul></ul><ul><ul><li>Do you carry appropriate insurance to ensure that the organization can continue to function under adverse circumstances? </li></ul></ul>
  11. 11. Financial Issues Board Members Should Address <ul><li>Meeting Guidelines and Requirements Set by Funders </li></ul><ul><ul><li>Restricted gifts must be used for the purpose intended by the donor. </li></ul></ul><ul><ul><li>Each restricted fund requires a separate accounting of expenses. </li></ul></ul>
  12. 12. Financial Issues Board Members Should Address <ul><li>Avoiding Conflicts of Interest </li></ul><ul><ul><li>Inappropriate financial gain by staff or volunteer from the organization. </li></ul></ul><ul><ul><li>There should be a written and approved policy prohibiting conflict of interest. </li></ul></ul>
  13. 13. So………. <ul><li>In order to fulfill those responsibilities ….. </li></ul><ul><li>you need to know how to read financial statements and audits! </li></ul>
  14. 14. Understanding Nonprofit Financial Statements <ul><li>Statements of Financial Position …….. </li></ul><ul><li>AKA Balance Sheet </li></ul><ul><ul><li>Summarizes assets, liabilities, and net assets at a point in time (end of month, quarter, or fiscal year normally). </li></ul></ul><ul><ul><li>Total assets “balance” with the sum of liabilities and net assets (AKA Fund Balances). </li></ul></ul>
  15. 15. Understanding Nonprofit Financial Statements <ul><li>Statement of Activities </li></ul><ul><ul><li>Summarizes revenue and expenses within each “fund” during the period being reviewed. </li></ul></ul>
  16. 16. Understanding Nonprofit Financial Statements <ul><li>Statement of Cash Flows </li></ul><ul><ul><li>Categorizes revenue and expenditures based on three types of activities: operating, investing, and financing. </li></ul></ul>
  17. 17. Understanding Nonprofit Financial Statements <ul><li>Annual Financial Statements </li></ul><ul><ul><li>Independent auditor’s report </li></ul></ul><ul><ul><li>Statement of financial position </li></ul></ul><ul><ul><li>Statement of activity </li></ul></ul><ul><ul><li>Statement of functional expenses </li></ul></ul><ul><ul><li>Statement of cash flows </li></ul></ul><ul><ul><li>Notes to financial statements </li></ul></ul><ul><ul><li>Supplementary information if needed </li></ul></ul>
  18. 18. Understanding Nonprofit Financial Statements <ul><li>Independent Auditor's report </li></ul><ul><ul><li>By law, must be done by outside certified public accountant, with financial information provided by organization. </li></ul></ul><ul><ul><li>Includes a letter to the Board describing their analysis of the fairness of the financial statements and if they conform to generally acceptable accounting practices (GAAP). </li></ul></ul>
  19. 19. Understanding Nonprofit Financial Statements <ul><li>Independent Auditor's Report will also include: </li></ul><ul><ul><li>Notes to Financial Statements </li></ul></ul><ul><ul><li>Supplementary information </li></ul></ul><ul><ul><li>Management Discussion and Analysis </li></ul></ul>
  20. 20. Understanding Nonprofit Financial Statements <ul><li>Board Response to Audit </li></ul><ul><ul><li>The auditor reports to the Board not to the staff. </li></ul></ul><ul><ul><li>The Board hires the auditor to provide an independent oversight & must ensure that the auditor works for the Board. </li></ul></ul><ul><ul><li>The Board should discuss the financial statement with the auditor & ask about any unusual situations or questionable figures. </li></ul></ul>
  21. 21. Purchasing Financial Software American Legion Auxiliary – March 1, 2006
  22. 22. Where to start???? <ul><li>You need to analyze to what detail is the tracking and reporting you need. </li></ul><ul><ul><li>The more “restricted” income streams you have the more requirements for tracking. </li></ul></ul><ul><li>Know how many transactions (deposits & payments) you make each month. </li></ul><ul><li>Determine the expertise level of staff who will be using software. </li></ul><ul><li>Understand the capacity of your hardware for software requirements. </li></ul>
  23. 23. How to select software <ul><li>Talk to: </li></ul><ul><ul><li>your auditors about their experience and what they would recommend to meet your needs. </li></ul></ul><ul><ul><li>other organizations, about the same financial size, to get suggestions. </li></ul></ul><ul><ul><li>college instructors who teach financial classes. </li></ul></ul>
  24. 24. How to select software <ul><li>Experiment with trial packages online at vendor sites. </li></ul><ul><li>Visit and search for “nonprofit accounting”. </li></ul>
  25. 25. Resources <ul><li>BoardSource </li></ul><ul><li>National Council of Nonprofit Associations </li></ul><ul><ul><li>State organizations for the nonprofit sector that often have workshops & other materials. </li></ul></ul><ul><li>Wiley </li></ul><ul><li>Jossey Bass </li></ul><ul><li>Pfeiffer </li></ul>