What’s worse than sitting in a meeting and not understanding the presenter? When it’s numbers, that’s when!
Board members come from all walks of life, with quite varying backgrounds and talents. This is great news for the many ways that directors can contribute, but a challenge in one particular area: financials. All Board members have a fiduciary responsibility to understand the financial statements that summarize the use of the resources entrusted to the organization, but many of us do not have any experience with financials. We feel uncomfortable not knowing but even more uncomfortable asking!
Not to worry. Let’s walk through the basics…
The two key financial statements are the Income Statement and the Balance Sheet. There are others, but if you understand these two, you are well on the way. The income statement looks at your organization’s income and expenses over a period of time, typically a month, a quarter or a year. In the corporate world, also called a profit and loss statement. A balance sheet looks at what you own and what you owe, at a particular point in time. In our personal world, a net worth statement.
When you look at an Income Statement, start with total income, total expenses and the net surplus or deficit. Did you have a surplus for the period or a deficit? Look at the comparison with the prior period. Have things improved or worsened? What caused the change? Assuming you have a budget, how did income and expense compare with what you projected? If it was quite different, why?
One of the things that make not-for-profit organizational accounting more difficult to understand is the concept of accruals. An accrual means recording either income or expense for a time period that you know has taken place even if the money has not arrived yet, or has not been paid yet. You will see entries like accounts receivable, accounts payable, accrued vacation and so on. Your CFO or Treasurer will make these entries to ensure the statements are accurate. Feel free to ask about them, in particular, if they vary dramatically from a prior period.
The Balance Sheet is simple in concept but often complicated by again the issue of accruals and the need for adjustments. Everyone can understand having so much money in a bank account or funds in an investment or the value of a building, and we understand loans. What is challenging in a balance sheet is that we have to adjust these assets to their current value, involving amortization or depreciation or other entries. An example is personal computers. They are an asset but will only last say 3 years or 5 years, so you make an entry to reduce their value by a third or a fifth each year.
Another complication is earned revenue. Quite often charities will receive a grant from a government body or a foundation with the understanding that it be spent in a certain way to achieve certain objectives. In order to portray this properly, you can only recognize (take into income) the value of the grant that you have earned by doing the work. The remainder of the grant, assuming you received it all upfront, sits on the balance sheet as a liability because if you did not do the work, you might have to give the money back.
The final challenge in looking at income statements is that many not-for-profits receive funding that is restricted to particular programmes and has spending in those programs that is distinct from other areas of operation. In order to correctly report on this activity, many not-for-profits do fund accounting. This means in effect having a separate income statement, usually a separate column in a wider report, for each area of activity. As a Board member, you need to look at the overall organization and then also at the financials for each fund/programme.
I hope this has been helpful and that you feel you have learned a few things. Please ask questions in your meetings or set up a call or a meeting with the Treasurer or CFO to get a better understanding. It is your responsibility to understand the financials of your organization and you will find lots of people ready, willing and able to help you!
MAS consultants can help you ensure that you have the right financial management to move forward.
Would you like to know more about MAS? Access: https://masadvise.org/services/finance-accounting/
About Brian Traquair
Brian has been a volunteer consultant for MAS for 3 years, after a career as an executive in the software industry. Brian does strategy, finance and technology assignments for MAS leveraging his business background as well as two decades of volunteer work with not-for-profits.