Financial statements for your nonprofit organization regularly slide over your desk and pass through board members’ hands, providing a wealth of financial data regarding the organization’s most recent month, quarter, or year. But do you and the board utilize this data to formulate future business plans and decisions?

Audited financial statements are similar to a family photo album since they detail a snapshot of the nonprofit organization’s history. A closer examination of the details—and the story they combine to tell—may help you better manage your organization.

Understanding Basic Nonprofit Organization Financials

To glean meaningful insights from these documents, it’s necessary first to understand what each statement represents— whether it creates a trend analysis, industry comparison, or projection of upcoming challenges. So what are the basic components of financial statements and their purposes required for this strategy?

1. Statement of financial position. This report is a snapshot of your nonprofit’s financial health on a given date—usually at the end of a month, quarter, or year. It lists your nonprofit’s assets (items owned), liabilities (monies owed), and net assets (owned items after monies owed are paid).
2. Statement of activities. If the statement of position is a snapshot, then this statement of activities is a motion picture since it illustrates what occurs over a period of time. This statement provides details about the nonprofit’s incoming revenue and incurred expenses for a period ending on a specific date. A popular example is “the year ending December 31, 2012.” (This date coincides with the statement of financial position.) The statement of activities typically summarizes funds coming in by type of revenue and support—such as fees and service contracts, grants and contributions, and investment income. The statement also summarizes expenses — typically under the categories of programs, management and general, and fundraising.
3. Statement of functional expenses. This statement displays a chart of expenses for the same period as the statement of activities. Columns across the page categorize the expenses into the function (usually fundraising, program, management/general, and total) that benefited from the expense. It lists expenses such as salaries and related personnel costs, followed by a breakdown of all other significant operating expenses down the page, such as rent, professional fees, and other costs.
4. Statement of cash flows.This report presents the impact of the nonprofit’s activities on cash for the same period as the statements of activities and functional expenses. It segments cash coming in and going out into operating, investing, and financing categories.
5. Notes to the financial statements. These remarks detail accounting policies and information about certain entries presented in the statements. Specifics on the activity in endowment funds and information on temporarily restricted net assets are, for example, given in the disclosures. They also include details about line items, such as the allowance or discount included in long-term pledges receivable.

Using Financials to Investigate

It’s critical that your nonprofit perform monthly comparisons between the financial results and the corresponding budget. Most financial software programs allow the budget to be entered per month and produce statements that compare actual results to what was budgeted.
Follow a policy of investigating any variances greater than a certain dollar amount or percentage. For example, a smaller nonprofit organization might base this dollar amount on the one used in its check-signing policy. Or, a percentage of 5% to 10% variance is often used as the rule of thumb. This variance policy allows you to assess operations in a timely way while evaluating the performance of individual programs and departments.

Using Figures to Forecast

Planning for the near future is critical in today’s lean economy. You can compare actual monthly results through the most recent month and add future budgeted monthly amounts to prepare a forecast of the full-year results. This “best guess” of what will happen to the organization financially over a specific time period may indicate the need to generate more revenue or trim planned spending. In other words, the forecast should indicate whether you’re on track with your original budget, or if it should be revised.

A similar model can be used to prepare a cash-flow projection, which is particularly helpful for nonprofits with cyclical cash needs. The projection can help you plan properly and make good investment decisions. If it shows you have excess cash in September, for example, but will need to use it in February, invest it in such a way that it can be available later.

Finding Knowledge in the Numbers

Financial information should be used to evaluate the organization’s effectiveness in meeting its mission. Monitoring program information from detailed financial records can help determine whether you accomplish specific goals. For example, if your objective is to increase membership by 10%, then examine the total collected membership fees and evaluate your progress. If you need $1 million to build a new facility, use the monthly statement of activities to monitor pledges and donor payments.

Make Your Nonprofit Financials Count

As management and the board evaluate risk and make strategic decisions, your nonprofit’s financial information will serve as a critical snapshot. Have the statements available for the decision-makers in a timely fashion and present them in a format that’s easy to understand.

If your organization has an annual financial statement audit*, the accounting firm conducting the audit should present this information to the board. Also, have the financial statements available to donors, potential donors, and grantors so they can see how their support is being used. Financial facts impact most decisions, so take advantage of this resource. If you need assistance, call CRI’s nonprofit organization advisory team.