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How to Get Your Board Onboard with Non-Profit
Financial Statements
Stephanie OLeary, Senior Consultant at
AMS December 4, 2014 1230 pm 130 pm
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Why this training was developed

• Board Members in non-profit organizations often
• Come from the for-profit world
• Do not have a financial or accounting background
• Need to be trained on understanding what their
  role is regarding financial management
  oversight

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Why this training was developed

• Help us train our board members on how non profit
  financial statements work
• Highlight some best practices to help board
  members know how to provide proper financial
  oversight
• Provide necessary tools for monitoring and
  strengthening our programs and services

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Agenda

• Training Overview
• Non-Profit Terminology
• Best Practices for Reporting, Budgeting and Cash
  Flow Management
• Ratios and Dashboards
• Struggles/Issues you face

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• Non-Profit Terminology

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Non-Profit Terminology

• Key Understanding what the Organization does and
  where the come from
• Board members need to understand the organization
  before they can understand the financial
  statements
• Revenue cycle government contracts, development
  fees, grants, fee for services/revenues are much
  different than for-profits
• Cash
• Accounts Receivable

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Non-Profit Terminology

• Key Non-Profit Characteristics
• Fiscal Year what is the organizations FYE?
• Reporting Requirements can be a burden
• Annual, federal and state audits
• Lack of staff capacity
• Equity is much different
• Funds need to be used for programmatic services

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Non-Profit Terminology

• Key Communicating what the Financial Statements
  mean
• Financial Statements
• Balance Sheet vs Statement of Financial Position
• Profit and Loss/Income Statement vs Statement of
  Activities
• Statement of Functional Expenses
• For-Profits focus the report on generating more
  profits
• Non-Profits focus on the programs, research and
  services provided by the organization

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Non-Profit Terminology

• Losses what does this mean for a non-profit?
• Even though we had a loss, did we meet our goals
  and objectives?
• We need cash but non-profits arent in the
  business for accumulating assets.
• Fluctuate year to year
• Purpose is to spend on charitable programs
• Continual losses year after year do signal
  financial trouble
• Financially Stable
• The organization is able to stay out of debt
• The organization can fund its current programs

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Non-Profit Terminology

• Negative Fund Balance - what does this mean for a
  non-profit?
• Total liabilities exceed assets (Current Ratio)
• Looking at historical performance
• Looking at revenue performance by program
• Looking at cost structure by program

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Non-Profit Terminology

• Financial Health of a non-profit
• Dont judge a non-profits financial health as if
  its a for-profit company
• An investment to a non profit will not grow and
  return a profit to the donor
• Non-profits do not exist for the purpose of
  enriching shareholders

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Non-Profit Terminology

• Revenue Restrictions
• Temporary restricted revenues
• Unrestricted revenues
• Net Assets
• Unrestricted
• Temporarily Restricted
• Permanently Restricted

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• Best Practices for Reporting, Budgeting and Cash
  Flow Management

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Reporting for Non-Profits

• Link to strategic plan/mission
• Plan linked to budget
• Shows cash inflows and outflows
• Easy to understand
• Measures Key Performance Indicators (KPI) based
  on strategy
• Provide meaningful information

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Reporting for Non-Profits

• Internal Financial Reporting
• Basics
• Statement of Position
• Statement of Activities/Budget vs Actual
• Statement of Cash Flows/Internal Cash Flow
  Statement
• Best Practices
• Dashboard having key financial and reporting
  indicators
• Statistic by program (number served, cost per
  member)
• Variance explanations (what do the numbers mean)
• Graphs, charts

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Reporting for Non-Profits

• What Boards should be asking
• Can the organization (it) pay its bills (meet
  its obligations)?
• Are we raising revenues to cover expenses
  (surplus)?
• Are we managing fiscal operations well?
• Are we collecting accounts receivable?
• Are we paying our vendors/employees?
• Are we managing to budget?
• Are we adjusting expenses to revenue results?

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Reporting for Non-Profits

• What Boards should be asking
• What is our project pipeline?
• What is our revenue mix and are there risks of
  funding continuation?
• Are our program profitable or breaking even? Do
  we need to fundraise for different programs?
• What is our administration rate for expenses?
• Is it spending money wisely and in accordance
  with its mission?
• Are we meeting the goals of our strategic plan?
• Is it planning for the future?
• Is it saving money for a rainy day?

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Reporting for Non-Profits
Question Reports
Where do we want to go? Strategic plan
How are we going to get there? Budget
Do we have enough resources to get there? Balance Sheet and Cash Flow
Are we on track? Income Statement vs. Budget
If not, what are we going to do about it? Board Discussion
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Budgeting for Non-Profits

• What Boards should know about budgeting
• Know your goals and objectives
• Upper Management Support and Buy In on your
  process
• De-centralize the budgeting process
• Involve staff at other levels
• Create Strong Tools and Training (as needed)
• Work closely with revenue-generating staff
• Budget capital expenditures
• Budget a surplus
• Project cash flow
• Budget temporary and permanently restricted
  revenue
• Manage to your operating budget and your audited
  financial statements

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Cash Flow Management

• Prepare a cash flow projection with your budget
• Monitor and adjust cash flow projections monthly
  based on actual performance
• Report findings and identified issues to Senior
  Management and the Board as early as possible
• Review rolling 12-month cash flow projections
  with management and the board
• Increase or speed up cash inflows
• Decrease and/or slow down cash outflows
• Access additional cash through financing
• Line of credit
• Bridge loan

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• Ratios and Dashboards

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Ratios

• Ratios/Top Indicators Of Financial Health
• Financial ratio analysis is one tool used to
  improve financial decision making and alert
  management about issues.
• Ratios use financial data to summarize
  organizational performance.
• See how one organizations financial indicators
  stack up against its peers.

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Ratios

• Profit margins typically do not apply to
  non-profits
• Revenue reliability evaluate an organizations
  track record of bringing in recurring dollars, on
  an unrestricted basis, year after year.
• Consistent surpluses a healthy business model
  is one characterized by reliable revenue that
  covers operating expenses and contributes to
  surpluses all in the service of the mission.
  Positive operating results (unrestricted revenue
  consistently exceeding expenses) are an indicator
  of strong financial management.
• Full cost coverage
• Set revenue targets high enough to cover not just
  direct and indirect operating expenses but also
  the full cost of doing business (i.e. purchase of
  fixed assets, reduction of principal on debt,
  etc.)
• Surpluses contribute to savings (i.e. strategic
  opportunity, rainy day fund)

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Ratios

• Debt to Equity (Leverage Ratio) measures an
  organizations ability to meet financial
  obligations. The number of dollars of Debt owed
  for every 1 in Net Worth. (Total Liabilities /
  Net Worth - Should ideally be less than 1.0).
  Example a Debt to Equity ratio of 1.10 means
  that for every 1.00 of Equity that the
  organization has invested, it owes 1.10 of debt
  to its creditors.
• Current Ratio measures an organizations
  ability to pay short-term obligations (1.25
  1.50 is considered adequate). A ratio of 1.14
  means that for every 1.00 of current
  liabilities, the organization has 1.14 in
  Cash/AR with which to pay them.
• Ability to steward facilities if an
  organization owns property/equipment, it is
  responsible for maintaining and replacing these
  assets over time should have reserves
  dedicated by the BOD for these improvements/replac
  ements. If not, are there appropriate levels of
  liquidity to meet these needs?
• Appropriate liquidity one way to measure this
  is to see how many months of expenses can be
  covered with available unrestricted operating
  cash (or access to it). As a general guideline,
  fewer than 3 months of cash is tight for non
  profits (though it depends on different
  elements).

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Ratios

• Ratios for Program, Administration and
  Fundraising Expenses high admin costs are
  considered a red flag
• Contributions and Grants Ratio received from
  donors, foundations, etc.

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• Questions?

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Contact Information

• Stephanie OLeary
• Senior Consultant, Nonprofit Client Practice
• Accounting Management Solutions, Inc
• 800 South Street Suite 195
• Waltham, MA 02453
• Phone [phone]
• E-mail soleary_at_amsolutions.net