Board members are responsible for the financial governance of their organization. One of these responsibilities is to monitor the budget using internally prepared financial reports.
The purpose of this article is to help board members who do not have financial experience learn some of the things to look for in financial reports that are usually provided to board members monthly or quarterly.
In this article, I refer to a sample set of monthly internal financial reports for an association Sample Financial Statements.pdf.
Statement of Financial Position
The Statement of Financial Position (called a Balance Sheet in for-profit businesses) is a snapshot of an organization’s company’s Assets (what is “owned”), Liabilities (what is “owed”), and its Net Assets (called “Equity” in for-profit businesses) at a given point in time. “Net Assets” is the difference between what your organization owns and what it owes.
Key areas to look at in the Statement of Financial report are:
The relationship between Current Assets and Current Liabilities
This relationship is an indicator of your organization’s ability to meet its current debts using its assets that can be converted easily into “cash”
All other things being equal, current assets should be larger than current liabilities
There is no ideal ratio of current assets to current liabilities
In the sample Statement of Financial Position, the organization’s current assets are 1.79 times larger than its current liabilities; this ratio is very good—especially, since the accounts receivable is $202
If the accounts receivable is large, then you should ask the treasurer to report on:
• Invoices outstanding for more than 90-days
• Invoices outstanding for membership fees
Depending on the nature of your organization, outstanding membership fees may be difficult to collect, if membership is voluntary
If the current liabilities are not larger than the current assets by a comfortable amount then:
Consider calling the treasurer and ask him/her to bring to the next board meeting copies of the most recent documents showing that all bills due to the federal and provincial governments are paid and evidence that all wages—including vacation pay and overtime—have been paid
This is important to you as directors are personally responsible for the above if they are not paid—Director’s and Officer’s Liability Insurance does not provide coverage for these liabilities
Each board member is jointly and severally personally responsible for the above; this means that the government can seek payment from the board member(s) with the deepest pockets
At the next board meeting ask, “How are we going to pay our bills?”
Statement of Operations: Budget vs. Actual
The Statement of Operations (called an Income Statement in for-profit businesses) shows the organization’s Revenue and Expenses. Not-for-profits call their income “Revenue Over Expenses”.
Check to ensure that the reported Revenue Over Expenses is the same amount that is on the third line from the bottom of the Statement of Financial Position worksheet “Revenue Over Expenses (2013)”; the amount in this example is $96,653.97.
There are three columns of numbers on this report:
• Jan – Dec 13 column shows the actual revenue and expenses for the period reported
• Annual Budget column shows the budgeted revenue and expenses for the period
It is a best practice for a board to approve the annual budget at least one-month before the start of an organization’s fiscal year; if there is a need to make a change(s) to the budget, then this statement should contain an additional column, Revised Budget
• Better/(Worse) column shows the amount that is better than or worse than the approved annual budget
This Statement of Operations separates revenue and expenses incurred in the operation of the organization from its annual conference.
Our office is now recommending to its clients, who have a conference or other major significant source of revenue, to report them separately. Separating them makes it easier to compare operating financial results from year-to-year, because these types of revenue and expenses can vary significantly—for example, if there is not a major conference each year.
Further Reading
You can learn much more about understanding the financial statements of a not-for-profit organization by downloading the Guide to Financial Statements for Not-For-Profit Organizations: Questions for a Director to Ask published by the Canadian Institute of Chartered Accountants (CICA) cica.ca/focus-on-practice-areas/governance-strategy-and-risk/not-for-profit-director-series/npo-briefings/item65428.pdf.
The above is provided for informational purposes only. It does not constitute accounting, or other professional advice, and you may not rely on it as such.
[1] Accountants use the words “current assets” and “current liabilities” to mean bills that are due within one-year.
[2] To learn more go to strauss.ca/exposures-facing-directors-and-officers-of-non-profit-organizations.