Making The Most Of Your Financial Statements


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Like it or not, a not-for-profits financial statements are often used by a variety of stakeholders as a tool by which to judge an organization’s potential for success. Making sure your statements do more than just reveal the value of your assets is essential, especially when donors receive more requests for support than they can ever hope to meet.

This webinar will provide attendees with tips for improved financial communication & insight into the analysis that would be funders may conduct.

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Making The Most Of Your Financial Statements

  1. 1. Making the Most of Your Financial Statements Jennifer Ahern Lammers Use Twitter Hashtag #npweb Special Thanks To Our Sponsors
  2. 2. <ul><li>A Proud Sponsor of </li></ul>Helping ordinary people raise extraordinary amounts for nonprofits is all we do, and we love it.
  3. 3. Today’s Speakers Jenn Lammers The Philanthropy Hub Hosting: Chris Dumas,
  4. 4. Nov. 3, 2010 Prepared By: Jennifer Ahern Lammers, MPA, CNAP Prepared For: Nonprofit Webinars – Wednesday Webinar Series Making the Most of Your Financial Statements
  5. 5. A Simple Truth <ul><li>Financial statements are increasingly being used by funders, reporters, and other stakeholders to make decisions about nonprofit organizations </li></ul>
  6. 6. Complete Financial Statements <ul><ul><li>Statement of Financial Position (Balance Sheet) </li></ul></ul><ul><ul><li>Statement of Activities (Statement of support, revenues, expenses, and changes in fund balance) </li></ul></ul><ul><ul><li>Statement of Cash Flows </li></ul></ul><ul><ul><li>Statement of Functional Expenses , if required, for Voluntary Health and Welfare organizations </li></ul></ul><ul><ul><li>Accompanying Notes to the financial statements </li></ul></ul>
  7. 7. Every Audit Opinion States . . . <ul><li>that the financial statements attached </li></ul><ul><li>are the responsibility and product of </li></ul><ul><li>MANAGEMENT </li></ul>
  8. 8. Own Your Statements <ul><li>Understand what the documents say and how they say it </li></ul><ul><li>Work with your auditor on presentation </li></ul><ul><li>You know your organization best </li></ul><ul><li>Clarity and transparency matter, even to financially stable “good” charities </li></ul>
  9. 9. Audit Opinions
  10. 10. Other Statement Options
  11. 11. Statement of Financial Position <ul><li>A picture of the organization’s financial health at the close of the fiscal year or other specified time period </li></ul>
  12. 12. Also Known as the Balance Sheet <ul><ul><li>Assets - Liabilities = Net Asset </li></ul></ul><ul><ul><li>What you OWN – What you OWE = Anything LEFT OVER </li></ul></ul>
  13. 13. Balance Sheet
  14. 14. Content and Presentation <ul><li>Must report on organization as a whole </li></ul><ul><ul><li>Instead of reporting on separate functions of the organization </li></ul></ul><ul><li>Organizes accounts into asset and liability classifications such as: </li></ul><ul><ul><li>Current assets, fixed assets, current and long term liabilities, as of a specific moment in time (last day of the fiscal year) </li></ul></ul><ul><li>Focuses on liquidity </li></ul><ul><ul><li>Assets are presented in their proximity to cash </li></ul></ul><ul><ul><li>Liabilities are presented according to the nearness of their maturity and resulting use of cash </li></ul></ul>
  15. 15. Net Assets <ul><li>Unrestricted </li></ul><ul><ul><li>Excludes assets that have donor-imposed restrictions </li></ul></ul><ul><ul><li>Somewhat similar to the Retained Earnings account of commercial financial statements </li></ul></ul><ul><li>Temporarily Restricted </li></ul><ul><ul><li>Includes assets for which the use has been restricted by donor </li></ul></ul><ul><li>Permanently Restricted </li></ul><ul><ul><li>Sometimes called an “endowment account” </li></ul></ul><ul><ul><li>Asset must be kept in perpetuity by the not-for-profit organization, per donor instructions </li></ul></ul><ul><ul><li>Earnings from Permanently Restricted Net Assets can either be unrestricted or temporarily restricted, per donor instructions </li></ul></ul>
  16. 16. Unrestricted Net Asset <ul><li>Unrestricted Net Assets can take many forms, many of which are less accessible for general use </li></ul><ul><li>Consider breaking out the following Unrestricted Net Assets in the Balance Sheet: </li></ul><ul><ul><li>Board Designated Reserves </li></ul></ul><ul><ul><li>Facilities and Equipment </li></ul></ul>
  17. 17. ABC Organization Statement of Financial Postion December 31, 2010 and 2009 Assets 2010 2009 Cash $50,000 $82,768 Accounts Receivable $256,164 $314,709 Unconditional Promises to Give $229,382 $204,269 Grants Receivable $54,691 $215,875 Prepaid Expenses $28,463 $40,636 Property & Equipment (net of dep) $1,942,736 $1,993,281 Other Assets $19,054 $26,817 Total Assets $2,580,490 $2,878,355 Liabilities and Net Assets 2010 2009 Liabilities Line of Credit $117,319 $136,400 Accounts Payable $126,394 $151,759 Accrued Expenses $74,000 $91,080 Accrued Payroll and Taxes $48,461 $120,238 Long-term Debt $673,714 $686,150 Total Liabilities $1,039,888 $1,185,627 Net Assets Unrestricted 1,076,134 1,050,277 Temporarily Restricted 258003 435923 Permanently Restricted 206465 206465 Total Net Assets 1,540,602 1,692,665 Total Liabilities & Net Assets $2,580,490 $2,878,292
  18. 18. Can the organization cover its current liabilities? <ul><li>Quick Ratio </li></ul><ul><li>   </li></ul><ul><li>Cash + Accounts Receivable </li></ul><ul><li>____________________________ </li></ul><ul><li>Current Liabilities </li></ul><ul><li>For most nonprofits, you would want to see a ratio of 1 or more </li></ul><ul><li>A ratio of less than one may mean that the organization is facing or may face cash flow issues </li></ul>
  19. 19. How much does the organization rely on borrowed money? <ul><li>Debt to Net Asset Ratio: </li></ul><ul><li>Loans and Notes Payable </li></ul><ul><li>______________________________ </li></ul><ul><li>Net Assets </li></ul><ul><li>For some organizations, a debt management allows them to leverage their available assets to provide the greatest amount of services in a given year </li></ul><ul><li>For others, an over reliance on borrowed money main indicate that the organization is having a hard time meeting its obligations </li></ul>
  20. 20. Statement of Activities <ul><li>A record of an organization’s financial activities </li></ul><ul><li>for 12 month period </li></ul>
  21. 21. Statement of Activities <ul><li>Where money came from and what it was spent on over a particular period of time </li></ul><ul><li>Most analyzed statement included in an audit packet </li></ul>
  22. 22. Presentation <ul><li>Revenues are presented according to donor restriction: </li></ul><ul><ul><li>Unrestricted </li></ul></ul><ul><ul><li>Temporarily Restricted </li></ul></ul><ul><ul><li>Permanently Restricted </li></ul></ul><ul><li>Although both are accepted by GAAP the column format – not the stacked – is best as it is much easier to understand </li></ul>
  23. 23. Revenues <ul><li>Sources of revenue are broken down and often include: </li></ul><ul><ul><li>Individual support </li></ul></ul><ul><ul><li>Foundation and corporate support </li></ul></ul><ul><ul><li>Special events revenue </li></ul></ul><ul><ul><li>Earned income </li></ul></ul><ul><ul><li>Interest </li></ul></ul><ul><ul><li>Assets released from restriction </li></ul></ul>
  24. 24. Functional Reporting of Expenses <ul><li>Audited statements are required to allocate expenses in three classes: </li></ul><ul><ul><li>Program Services: activities that result in services being distributed to beneficiaries </li></ul></ul><ul><ul><li>Management and General: oversight, business & general financial management </li></ul></ul><ul><ul><li>Fundraising: activities that induce donors to contribute </li></ul></ul><ul><li>May appear in the Statement of Activities or the Notes </li></ul>
  25. 25. <ul><li>Only donors can make restrictions! </li></ul><ul><li>However, we often shape the nature of the restriction by the language of the “ask” </li></ul><ul><li>Make sure your revenues are appropriately categorized </li></ul><ul><li>Make sure you have back up to substantiate nature of the restriction </li></ul>Donor Restrictions
  26. 26. ABC Organization Statement of Activities For the Year Ended December 31, 2009 Temporarily Restricted Permanently Restricted Revenue and Other Support Unrestricted Total Service revenues $4,982,631 $4,982,631 Grants $238,000 $151,790 $10,000 $399,790 Contributions $109,058 $77,201 $186,259 Special Events (less of direct costs of $19,399) $1,976 $1,976 Interest & Dividends $38,032 $38,032 Unrealized Gain $117,425 $117,425 Misc. $21,382 $21,382 Net Assets released from restriction $406,911 $(406,911)   $- Total Revenue $5,915,415 $(177,920) $10,000 $5,747,495 Operating Expenses Program Services Association Services $2,842,480 $2,842,480 Children & Teen Services $675,153 $675,153 Family Supoort $822,531 $822,531 Therapy $1,038,814     $1,038,814 Total Program Expenses $5,378,978 $5,378,978 Supporting Services Management and general $188,896 $188,896 Fundraising $166,403     $166,403 Total Supporting Expenses $355,299 $355,299 Total Expenses $5,734,277 $- $- $5,734,277 Change In Net Assets $181,138 $(177,920) $10,000 $13,218 Net Assets Beginning of Year $2,348,570 $435,923 $206,465 $2,990,958 Net Assets End of Year $2,529,708 $258,003 $216,465 $3,004,176
  27. 27. Statement of Activities: Program Expense <ul><li>Present program expenses in a manner consistent with the organization’s other materials </li></ul>
  28. 28. Examples <ul><ul><li>If the organization says it has 5 program areas, the financial statement should present expense for each of those areas </li></ul></ul><ul><ul><li>If the organization’s materials say it provides “Low cost or free legal, financial, and real estate services ”, the financial statement should not say “ Professional Services ” </li></ul></ul><ul><ul><li>“ Other program expenses” is never a descriptive or appropriate expense item </li></ul></ul>
  29. 29. How reliant is this organization on contributions? <ul><li>Ideally, organizations have a diversity of revenue sources: </li></ul><ul><li>Contributed Funds </li></ul><ul><li>Program Revenue/Government Contracts </li></ul><ul><li>Interest earnings </li></ul><ul><li>Contributions can be the least stable source of funds </li></ul>
  30. 30. How much revenue remains temporarily restricted? <ul><li>Reasons for Temporarily Restricted Funds: </li></ul><ul><li>Saving for a future program or specific purchase </li></ul><ul><li>Not appropriately allocating expenses for specific programs or grants </li></ul><ul><li>Having difficulty with a specific program </li></ul><ul><li>Successful in raising temporarily restricted (program or project specific) but lack unrestricted revenue </li></ul>
  31. 31. How does this organization spend its money? Classification Description Industry Benchmarks Program , separated by major program Activities that result in services being distributed to beneficiaries 70% Support Services: Management & General Activities such as oversight, business and general financial mgmt 20% Support Services: Fundraising Incurred in inducing donors to contribute 10%
  32. 32. How effective is the organization’s fundraising? <ul><li>Contributions & Special Events Revenue </li></ul><ul><li>______________________________ </li></ul><ul><li>Total Fundraising Costs </li></ul><ul><li>Some forms of fundraising are more expensive than others </li></ul><ul><ul><li>Galas </li></ul></ul><ul><ul><li>Telemarketing </li></ul></ul><ul><ul><li>Direct mail </li></ul></ul><ul><li>Some forms of fundraising are less expensive </li></ul><ul><ul><li>Grants </li></ul></ul><ul><ul><li>Legacies and bequests </li></ul></ul><ul><li>By combining expensive money with less expensive money, an organization should maintain a reasonable cost of fundraising </li></ul>
  33. 33. What is reasonable? <ul><li>An return of .70 cents or more on each dollar spent on fundraising is the best practice </li></ul><ul><li>Some watchdogs will fault an organization if the return for the year is below .65 cents, others .75, while still others do a comparison of yearly averages in a particular field/location and will rank you against your “peers” which makes this a moving target </li></ul><ul><li>An organization primarily supported by contributions MUST have fundraising expenses </li></ul>
  34. 34.   Does the organization have sufficient unrestricted net assets? <ul><li>  </li></ul><ul><li>Available Unrestricted Net Assets </li></ul><ul><li>________________________________ </li></ul><ul><li>Average Monthly Operating Costs </li></ul><ul><li>Number of Months covered without new revenue? </li></ul><ul><li>Significantly less than 3 months is problematic </li></ul><ul><li>6 months or more is above average </li></ul>
  35. 35. Statement of Cash Flows <ul><li>Reports the cash generated and used during the year </li></ul>
  36. 36. Statement of Cash Flows <ul><li>The Cash Flow Statement looks at: </li></ul><ul><ul><li>Where an entity obtained its cash and </li></ul></ul><ul><ul><li>Where it spent cash during a certain time period </li></ul></ul><ul><li>Activity reported regarding: </li></ul><ul><ul><li>Operations </li></ul></ul><ul><ul><li>Investing </li></ul></ul><ul><ul><li>Financing </li></ul></ul><ul><li>Must disclose any non-cash activity such as acquisitions of equipment on finance </li></ul>
  37. 37. Where the Cash Came or Went
  38. 38. Misc. Organization for Good Statement of Cash Flow Fiscal Year Ended September 31, 2010 2010 Cash Flow from Operating System Increase (decrease) in net assets $XXXX Adjustments to reconcile decrease in net assets to cash Depreciation $XXXX Net realized gain on the sale of investments ($XXXX) Net unrealized gain on sale of investments ($XXXX) Change in opertating assets and liabilities Reimbursable expenditures under contracts ($XXXX) Contributions receivable $XXXX Prepaid expenses and other assets $XXXX Grants payable ($XXXX) Accounts payable and accrued expenses $XXXX Net cash (used in) provided by operating activities   Cash flows from investing activities Purchase of investments ($XXXX) Proceeds from the sale of investments $XXXX Purchase of fixed assets ($XXXX) Sale of fixed assets $XXXX Use of restricted cash ($XXXX) Net cash provided by investing activities $XXXX Cash flows from financing activities Payment of note payable ($XXXX) Net cash used in financing activities ($XXXX) Net increase in cash and cash equivalents $XXXX Cash and cash equivalents Beginning of year $XXXX End of year $XXXX
  39. 39. Statement of Functional Activities <ul><li>Detailed accounting of expenses by major expense area, broken down by common expense type </li></ul>
  40. 40. Statement of Functional Activities <ul><li>Required by GAAP for all voluntary health and welfare organizations </li></ul><ul><li>Required by some watch dogs for all charities soliciting public support </li></ul><ul><li>An important document for demonstrating priorities and clarifying necessary expenses </li></ul>
  41. 41. ABC Organization Statement of Functional Expense For the Fiscal Year Ended December 31, 2009 Program Support 2009 Soup Kitchen Night Shelter Homeless Intervention Total Program Administration Development Total Support Total Expenses Compensation and related expenses Salaries and Wages 62,000 45,000 36500 143,500 75,000 58,000 133,000 276,500 Payroll Taxes 11000 3000 2000 16000 13,000 6000 19,000 35,000 Fringe Benefits 17360 12600 10220 40180 21000 16240 37240 77,420 Total 90,360 60,600 48720 199,680 109,000 80,240 189,240 388,920 OTP Outside services 12000 9000 12000 33000 0 36000 36000 69,000 Rent 22000 22000 0 44000 11000 11000 22000 66,000 Depreciation and amortization 20000 14000 0 34000 2000 3000 5000 39,000 Telephone 1000 1000 5000 7000 3000 4000 7000 14,000 Utilities 975 975 1950 400 400 800 2,750 Travel - - 1500 1500 1000 400 1400 2,900 Insurances 6500 8000 2300 16800 1200 7000 8200 25,000 Printing 900 250 1100 2250 11250 18000 29250 31,500 Equiptment rental 4500 0 0 4500 0 6500 6500 11,000 Postage 0 0 0 0 2400 3500 5900 5,900 Event Space Rental 0 0 0 0 0 22000 22000 22,000 Misc. 222 457 354 1033 354 555 909 1,942 Total 68097 55682 22254 146033 32604 112355 144959 290,992 Total Expenses 158,457 116,282 70,974 345,713   141,604 192,595 334,199   679,912
  42. 42. Statement of Functional Expenses: Clear Labels <ul><li>Look to the IRS 990 Statement of Functional Expenses for sample wording and break down of expenses </li></ul><ul><li>When an organization has a unique expense, make sure it is called something that explains it </li></ul><ul><li>“ Misc.” should be used for truly immaterial expenses and not include normal, expected expenses like salaries, rent, interest, etc. </li></ul>
  43. 43. The Notes: Significant Disclosure Guidelines <ul><li>Description of the organization </li></ul><ul><li>Basis of Accounting (cash, accrual and modified accrual) </li></ul><ul><li>Fixed Assets </li></ul><ul><li>Debt </li></ul><ul><li>Temporarily and Permanently Restricted Net Assets </li></ul><ul><li>Related Party Transactions </li></ul><ul><li>Subsequent Events </li></ul><ul><li>Commitment and Contingencies </li></ul>
  44. 44. The Notes: Not Extra Credit but Essential <ul><li>Note 1 is the first and only opportunity in the financial statement an organization has to present its mission and program in narrative form </li></ul><ul><ul><li>Make sure this note is up-to-date and includes not just the organization’s original programs but its current roster </li></ul></ul><ul><ul><li>Make sure that this statement is more than the perfunctory acknowledgement of 501(c)(3) status and incorporation </li></ul></ul><ul><ul><li>This statement should be given the same care the organization gives its annual report or website </li></ul></ul>
  45. 45. The Notes: More than a Template <ul><li>Note 2 is typically the explanation of accounting practices and methodology and comes straight from the audit firm </li></ul><ul><ul><li>If the organization does not have temporary or permanently restricted contributions or net assets, consider adding a statement after the standard explanation </li></ul></ul>
  46. 46. The Notes: More is Better <ul><li>If the organization has a unique situation, such as a significant and non-repeating revenue source, include an explanation in the notes </li></ul><ul><li>When describing related party transactions, provide enough information for the reader to understand whether or not this related transaction presents a conflict </li></ul>
  47. 47. Limit the use of acronyms or cryptic abbreviations <ul><ul><li>DCD, DHPD, DCF, etc. may be obvious government funders to you or your client but not to most readers </li></ul></ul><ul><ul><li>BASP, APE, etc. may be what the organization calls the Boys After School Program , or the AIDS Prevention and Education program, but not every one will understand </li></ul></ul>
  48. 48.   How does this year compare to last year? <ul><li>Note any significant deviation between years </li></ul><ul><ul><li>Look for a variance of greater than 20% </li></ul></ul><ul><li>On Balance Sheet </li></ul><ul><ul><li>More cash and less capital assets? </li></ul></ul><ul><li>On Statement of Activities </li></ul><ul><ul><li>Revenues by source </li></ul></ul><ul><ul><li>Admin or Fundraising way up? </li></ul></ul><ul><ul><li>Program spending down? </li></ul></ul><ul><li>On Statement of Functional Expenses? </li></ul><ul><ul><li>Salaries down? </li></ul></ul>
  49. 49. Going Beyond Compliance <ul><li>Financial Statements are used by funders, reporters, and other stakeholders to make decisions </li></ul><ul><li>As such, Financial Statements should do more than conform with GAAP </li></ul><ul><li>Financial Statements should help the reader understand a charity’s mission, priorities and unique circumstances </li></ul>
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