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How to Make Sense of a Difficult Nonprofit Financial Report

best practices board finances foundation reporting Mar 30, 2023

How to Make Sense of a Difficult Nonprofit Financial Report

     My hope is that you're getting a clear and understandable financial report that makes your nonprofit decisions easy and actionable… but my experience says you're probably not. So I wanted to give some ideas on what to do if you're getting a report that is really difficult and hard to make sense of. You should have two types of reports at a minimum. We’ll break down each one below.  

Balance Sheet

The first report you should be receiving is a balance sheet.  In the nonprofit world, we call it a statement of financial position, but they're functionally the same. So if you're getting one of those, this is what we're talking about. You'll need to first ask about the cash balances. If they’re not clearly labeled on your report, you’ll need to ask where those funds are denoted. What bank account are those funds held at?

     Next, you should also be asking periodically to see the bank reconciliations if you're looking at that to make sure they make sense. Are there really old outstanding items that shouldn't be there? Are there really old deposits that haven't cleared the bank yet?, There will undoubtably be other things that will pop out at you once you get a chance to look it over.

     Then, you’ll also want to inquire about all those other little balances on the balance sheet. I have seen countless examples of confusing balances. For example, a recent client had over $4,000 in payroll taxes with the opposite balance of what it should have been. So, according to the report, there were payroll taxes that had been overpaid, when in reality, that wasn't the case at all. So you should be asking about any kind of balance that you're seeing on your balance sheet report. 

     Additionally, I hope you have a net asset section that really does show whether there are restrictions and what those balances are. This is absolutely critical. If you're not getting that, I want to refer you back to some of my other posts below on net assets, because this is such an essential step for a nonprofit trying to get finances in order.  

The Truth About Fund Accounting: Can Nonprofits Benefit?

How to Track Restricted Funds in Quickbooks

What Are Net Assets for Nonprofits?

What Are Donor Restricted Funds in a Nonprofit?

Profit & Loss

     The next type of report you should be receiving is your Profit & Loss statement. This is also referred to as your Income Statement or Statement of Activities. All of these terms can be used interchangeably. , but you should find one of those titles on a report. Once again, you’ll want to look at balances. You should be able to see activity for the month and year to date or for the fiscal year. And you need to look to see if these numbers make sense? Do they make sense based on the conversations you're having? It can also be helpful to run some ratios or calculations based on relationships that you know exist in your nonprofit. 

Here's a couple of examples:

  •  salaries to total income-  What percentage of your income is being spent on salaries? 
  •  payroll taxes as a percentage of salaries- The tax rate varies by location, but you should know what that tax rate is and you should be able to calculate and compare the result to that percentage and understand any difference. 
  •  credit card processing fees to total donations- If you receive a lot of gifts that are paid via credit cards or bank cards, you'll want to see what that relationship looks like. 
  •  Facilities expenses as a percentage of total budget- Do you know what your facilities cost? Total these costs and then compare them to your total budget. Does that relationship make sense? 
  •  fundraising expenses as a percentage of related fundraising income- How much are you spending to generate how much funding?

     These questions will have you move  the conversation in the right direction. You see, we can all suffer from “group think” without even realizing it.  Silence can be a powerful cycle. The more silent we are or the longer we delay asking the question, the harder it gets to ask the questions. Time is not on your side.  So, if you're a new board member or new finance committee member, or maybe a new executive at a nonprofit, now's the time to start asking all those questions. And if not, then I want to invite you to find a posture that says, “Hey, this is a new season of asking and learning.” I promise you, if the financial report doesn't make sense, you're either going to learn something or the reporting will get better, or maybe both!

      As always, I want you to know that if this was all too much or you just need to slow it down and talk through it a little bit further, you can schedule a strategic consult with me today by clicking here.  I look forward to helping you!

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