reading financial statements

Reading Financial Statements and AuditsAmerican Legion Auxiliary – October 3, 2005

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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?

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Financial Responsibilities of the Nonprofit Board

• Fiduciary …. A trust held for the greater community. Custodians of something of value to the community.

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Financial Issues Board Members Should Address

• Financial Planningevaluation of existing & potential resourcesexamination of internal & external forces

affecting the organization & fundingexamination of alternatives & their financial

implications

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• Sufficient Available CashMonthly 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.

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• Satisfactory ReservesMost experts recommend one year of

operating expenses.

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• Relationship Between Revenue and ExpensesMore 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!!

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• Meeting the BudgetQuarterly, 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.

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• Propriety of ExpendituresProvide 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.

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• Insuring Against RisksIs 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?

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• Meeting Guidelines and Requirements Set by FundersRestricted gifts must be used for the purpose

intended by the donor.Each restricted fund requires a separate

accounting of expenses.

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• Avoiding Conflicts of InterestInappropriate financial gain by staff or

volunteer from the organization.There should be a written and approved

policy prohibiting conflict of interest.

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So……….

In order to fulfill those responsibilities …..

you need to know how to read financial statements and audits!

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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).

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• Statement of ActivitiesSummarizes revenue and expenses within

each “fund” during the period being reviewed.

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• Statement of Cash FlowsCategorizes revenue and expenditures based

on three types of activities: operating, investing, and financing.

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• Annual Financial StatementsIndependent auditor’s reportStatement of financial positionStatement of activityStatement of functional expensesStatement of cash flowsNotes to financial statementsSupplementary information if needed

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• Independent Auditor's reportBy 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).

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• Independent Auditor's Report will also include:Notes to Financial StatementsSupplementary informationManagement Discussion and Analysis

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• Board Response to AuditThe 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.

Purchasing Financial Software

American Legion Auxiliary – March 1, 2006

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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.

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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.

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How to select software

• Experiment with trial packages online at vendor sites.

• Visit www.findaccountingsoftware.com and search for “nonprofit accounting”.

http://www.findaccountingsoftware.com/

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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

http://www.boardsource.org/

http://www.ncna.org/

http://www.pfeiffer.com/

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