One of the most important duties as a member of a nonprofit’s Board of Directors is the stewardship of the organization’s financial resources. Board members play a pivotal role in monitoring the financial health of the organization. In fact, it is the fiduciary responsibility of the Board to do so. One of the ways the Board achieves this is by regularly reviewing several different financial reports.
These financial documents provide valuable insight into what your organization needs to fulfill its mission and continue to do so for years to come. So, which financial reports should a Board member use to assess an organization’s financial position? Let’s take a closer look.
Types of Financial Reports
As fiduciaries, Board members are legally required to act in the best interest of the nonprofit they serve. Members are obligated to ensure the organization’s financial resources are allocated appropriately and not misused. There are four primary reports the Board uses to stay abreast of the financial activities of an organization. In this first blog installment, we will provide an overview of the four reports. In the following two installments we will dive deeper into reviewing the Statement of Financial Position and Statement of Activities.
Statement of Financial Position
Also known as the Balance Sheet, the Statement of Financial Position is an essential indicator of financial health. When reviewing the Statement of Financial Position, Board members should look closely at the relationship between the organization’s assets and liabilities. The statement lists the organization’s assets and liabilities and reveals whether there is a surplus or deficit of Net Assets. Net Assets are the equivalent of Equity in for profit terms and represent the resources remaining to run the organization. For example, if the assets are higher than the liabilities, your organization is likely in good financial shape. On the other hand, if the liabilities are higher than the assets, it could indicate that your organization is having financial challenges. Board members can quickly gauge how balanced (or unbalanced) things are using this simple formula: Assets – Liabilities = Net assets.
Your review, however, should not end there. Net Assets appear in two forms – Net Assets with Donor Restrictions and Net Assets without Donor Restrictions. Net Assets with Donor Restrictions can only be used for specific purposes, so it is important for a nonprofit to have enough Net Assets without Donor Restrictions to be able to fund the operations and unrestricted activities of the organization.
Statement of Activities
Another financial report that is essential for Board members to review is the Statement of Activities. This document categorizes your organization’s revenue and expenses during a period of time – usually year-to-date on a monthly and quarterly basis, and annually. Typical revenue sources you might find on the Statement of Activities, depending upon the type of nonprofit, include program revenue, membership dues, grants, and donations. Your organization’s program, administrative, and fundraising costs are some of the typical expenses included on the Statement of Activities. The difference between the revenue and expenses is the net surplus or deficit and is also the change in Net Assets for that reporting period.
Statement of Cash Flow
An essential report in nonprofit accounting that a Board member will want to see is the Statement of Cash Flow. This document is created to analyze the organization’s cash inflows and outflows. A key purpose of this statement is for the Board to monitor the organization’s cash position at a point in time. This helps members stay informed about the usage of cash resources during the fiscal year.
Budget versus Actual
Every nonprofit should have an annual budget with estimated revenue and expenses allocated to each month of the fiscal year. Your nonprofit’s budget provides a plan for how your organization will spend its financial resources.
A budget should be prepared before the beginning of a fiscal year and entered in the accounting system. This will allow for regular comparisons of Budget versus Actual amounts. For example, what did management estimate the organization’s income and expenses would be versus what they actually ended up being? This helps the Board understand whether the budget is accurate or if changes need to be made to the financial assumptions.
How Often Should the Board Review Financial Reports?
The frequency in which Board members should review financial statements as a group depends on the Board’s meeting schedule. The Board should review the financial reports during every meeting. In some cases, monthly financial statements are sent to the Board to review in between meetings.
For Boards that meet monthly, the two most common financial reports to review are the Statement of Financial Position and Statement of Activities, including the Budget to Actual comparison. There are two additional financial reports the Board should be sure to review annually – the IRS Form 990 and, if audited, the draft audited financial statements.
As a Board member, you play a key role in the success of your nonprofit. Furthermore, the role you play in the continued financial viability of your organization should not be underestimated. A financially informed and engaged Board will help the organization not only survive but thrive.
Are you confident in the efficacy of your nonprofit’s accounting and financial reporting practices? If you’re unsure, our expert nonprofit accountants are standing by to help. Contact our team or schedule your free consultation today.