Reading Financial Statements

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