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Tools for Treasurers: Nonprofit Financial Reports

best practices board finances reporting Mar 07, 2024

     I’m often asked questions like, “What should a nonprofit treasurer be doing?” or “How should the board be engaged in the finances?” So, this is the first in a new series of articles to address questions like these. This series will not cover what the role of a treasurer is, because I’ve already addressed that in this post. I encourage you to check that out because the role can range from a treasurer that does everything related to finances, to a situation where they’re really just watching everything that's been done. So you'll first want to identify what type of organization you’re a part of to determine those expectations. But today, I want to share some of the financial tools that nonprofit treasurers can use, regardless of their specific role. 

     One of the best tools that a nonprofit organization's treasure and board should be using is the financial reports. I’ll break down for you what those are and how they should be used. There are two reports that you should have for every board meeting. What are they? 

Statement of Financial Position: The Nonprofit Version of a Balance Sheet

     The first tool in the nonprofit treasurer’s toolbox is a Statement of Financial Position. For profit organizations call this the balance sheet. It reflects a point in time (as of a specific date) typically a month end or a quarter end. This report shows you the balances for the things that the nonprofit owns (assets), the things the nonprofit owes (liabilities), and the the “net assets” which I’ll cover elsewhere in this. 

So what should you be looking for in your nonprofit’s Statement of Financial Position? 

Account Balances and Trends

     I like to keep an eye on the bank accounts and other kinds of cash and investment balances. Are the balances adequate? What are their trends? Have they been trending downward in an overall reduction? Is a downward trend expected? It's not necessarily a bad thing, but is it expected? Maybe you’d expect your balances to be trending upward but instead they're static. So you’ll want to look at these balances with a mindfulness of expectation vs. reality. You’ll also want to make sure your statement displays a prior reporting period (last month vs. current month, or last quarter vs this current quarter). I’d also recommend including a comparative column and a difference column so that this information becomes even more valuable and actionable.

Are The Other Assets and Liabilities Explainable?

     Look for other assets and other liabilities listed. Are they explainable? Don't be afraid to ask questions. It's the most important thing! Create a culture of openness, where asking the “silly question” is absolutely welcome! Many people will start with, “Well, I don't want to ask the dumb question, but…” or “This may be a silly question, but…” Instead, let’s create cultures where we can just ask! Create a culture of openness and communication. Especially in these two areas of assets and liabilities, you’ll find some weird stuff that can pop up here. So you should be looking for it and just be open to ask questions. For example, there really shouldn’t be a balance for payroll tax liability. If there is, let's ask why. Let's ask when it was paid. Let's ask some questions. 

     Another example is prepaid assets or prepaid expenses. These are on the asset side of the balance sheet. In this case, we’d typically want to be asking what is in there? What does this consist of and when will it be expensed? Sometimes, something lands on the balance sheet because someone didn't know where to put it as a prepaid expense. But then, the time comes when the services or the goods have actually been received, and this needs to be expensed. If this is the case, it shouldn't be on this report, it should be on another report, which we'll cover next. 

What Are The Nonprofit’s Net Asset Balances?

     One more thing to look for in your Statement of Financial Position is the net asset balances. This section of the report reflects the difference between the assets (what you own) and the liabilities (what you owe). “Net” assets, of course, does imply it should be positive. We definitely want positive net asset positions. The balances in this section are going to show you the strength of the nonprofit and their financial resources. They're also going to show you if there are any funds that are earmarked by the board. These net assets are designated for whatever purpose the board may have specified. The net asset section will also show you the funds that have been received which have donor restrictions. Those donor restricted funds have to be used for the purposes in which they were received. 

     Well, that covers our first report. Once again, every single time the board meets, we should have this report. It's non-negotiable. It's not okay to skip this. Many times an organization skips this report and runs to this next report. Don't do it!1133

Statement of Activities: The Nonprofit Version of a Profit and Loss Statement

     The second report is the Statement of Activities. A for-profit organization would refer to this as an Income Statement or a Profit and Loss Statement. Well, because it shows all of the ins and outs, it's better referred to in a nonprofit as the “Statement of Activities.” It lists all the ins and outs of the organization’s money. Here's a couple of questions that I would suggest asking when looking at this report: 

What is the Bottom Line Number?

     First, look at the very bottom number, the last number on the report. What's the ending net number for the month? Does it mean that there was more income than expenses or vice versa? Of course, you want to be thinking mindfully of your own nonprofit’s rhythms. If the number is negative, is that to be expected? (n our next video we’ll cover how to look at the budget analysis, which is where you'll truly get into the details of this concept) 

Where Are The Restricted Funds?

      Within this Statement of Activities, look for restricted gifts that are received or the expenditure of restricted funds. I think it's really important to group those things separately. I have a lot of nonprofit clients who use QuickBooks, and in that case, I recommend coding those ins and outs as “other income and expenses.” That way, they show up below the operating income total, which is a section of your Statement of Activities that deals with the operating income and operating expenses. I like to see that subtotal before we get into restricted revenue or expenses. The reason is because in restricted funds, you very often do expect timing differences. For example, think about a capital campaign, where you're launching into a campaign to raise capital to build a building. Well, you’ll begin receiving that income, every month, month after month, before you ever actually engage in the project to begin spending that money. So, if you're in the middle of a capital campaign, you are in a place where you would naturally expect a lot of income. On the other hand, if your campaign is winding down, maybe the income coming in has slowed, and now your expenses are up. So, if you don't have a subtotal before you get to the section that reports on the ins and outs from restricted funds, it can just be a little confusing to understand what is happening. Therefore, I’d definitely recommend that you have a subtotal of operating income and expense, or you could call it “unrestricted income and expense” and then use the bottom section for your restricted income and expenses (or “other income and expenses” in Quickbooks) Of course, other software products that are built specifically for nonprofits will offer far superior accounting opportunities. But I wanted to give you a little overview of how a QuickBooks set up could still work.

Income: Expectations and Trends

      Now it’s time to look at our income. So, starting with an idea of expectation, what do you expect your income to be? If you don't know what to expect, then ask! What makes sense? Maybe you have a nonprofit that bills for some services under a grant. Is that billing expected every month? Is it on schedule?  Perhaps your nonprofit does a lot of fundraising through a big annual event. Well, in this case, you might not see a fundraising income in every period, so start with the mindfulness of which month you’re in. What do you expect? Then look at the amounts and ask yourself if they make sense.

     Next, look at the income trends. If you have a Statement of Activity that shows several years or months prior, you can look at it and simply observe whether the pattern is going down, going up, or remaining static. Also, do we have any zeros when there should be an actual amount? These are some really valuable things to look for on the income side of your Statement of Activities. 

Expenses: Expectations and Trends

     Let’s look at expenses again here. Starting with expectation. What do we expect to see? Do we understand the line items? For instance, if you see a line item that says “management expense- $10,000.00” that's a very broad category. $10,000 in management expenses warrants a few questions like, “What's in this account?” or “Can you share with me what was spent that was coded to management expense?” It’s so helpful to get familiar with each of those categories and make sure that those account descriptions really could stand on their own. Maybe those “management expenses” were actually for a conference or some training and development for the leadership team. Then, let's put that expense in an account that more clearly reflects its purpose or correct the account name so that it reflects the nature of its contents. 

     Well, that covers our first tool- financial reports. These two reports are tools that should be brought to  every single meeting of your nonprofit’s board. Monthly meetings are ideal, but quarterly meetings are sometimes necessary in a smaller nonprofit. So that's where we're starting. 

     Next week we’ll cover how to look at the results and find out if they line up with what we expected or  what we planned to see happen in our nonprofit this month. If you don’t want to miss it, subscribe to my blog here to get weekly emails with my latest article or subscribe to my Youtube channel here to be notified whenever I post a new video! 

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