You’re on a non-for-profit board and one of your responsibilities is fiduciary responsibility. What does that mean? Fiduciary responsibility is the obligation to act in the best interest of another party. Your responsibility is to protect the property, financial assets, and reputation of the organization. Along with this you should be able to read and understand financial statements. So, what if you do not have a financial background? It is important that the accounting department is providing proper information to the board and its members. This information needs to be accurate, timely, and decision-useful. The full board should receive summary reports that include narrative notes prepared by the director or the accounting department that describes any significant changes or unusual balances. The finance committee and other various committees may need more detailed reports to analyze certain areas of the organization.
Here are some reports you should be looking at, what you should be able to learn from the reports, and some of the questions you should be asking in-regards-to the information provided.
The first repot you should be looking at is the Statement of Financial Position / Balance Sheet. This report shows the overall financial position of the organization at a given moment in time. It reflects the accumulated results of the organization since the beginning of its time. The first section of the report shows the assets of the organization. This includes what the organization has, what is owed to the organization, and what is invested by the organization. Some examples included cash, inventory, fixed assets, long term investments, grants promised but not yet received, and loans made to others. These should be listed in order of declining liquidity or which ones can be converted to cash the quickest. When looking at this report you should be able to see if the organization has enough cash to pay its bills, if the organization is collecting what is owed to them, whether the organization has too much inventory on hand, or if the organization needs to upgrade their equipment. The second section of this report shows the liabilities of the organization. Liabilities are what the organization owes to others such as vendors accounts payable, payroll liabilities, accrued expenses, and short and long-term loans. These are reflected in order of their maturity. Which is due first? Short-term are those items due within one year. When looking at liabilities, you should be asking, are vendors being paid timely, do we have enough cash to pay our bills, are we meeting our tax liabilities in a timely manner, are we strategically using our line of credit and do we have the means to repay it, and how much has the organization borrowed and is there a plan for repayment. The third and final part of the statement of financial position is the net assets section. Net assets reflect the net worth of the organization.
The second report you should be looking at is the statement of activities. This statement shows the organization’s income and expenses for a specific period-of-time. This report should show some comparisons for you to look at. It should include a column showing the prior year balances and it should have a column showing what was budgeted for the year. It is important to have the line items in the accounting software match the line items in the budget for proper comparison. This way you can see if the organization is on track compared to the prior year and compared to the current year budgeted amounts. Expenses should be shown by major program activity, management, and fundraising. This will show you how the organization spends its resources toward accomplishing its mission activities.
Hopefully after reading this you will have a better understanding of what reports you should be looking at and what information each of those provides for you to look at. If your organization is not providing these reports with the information mentioned above it is your fiduciary responsibility to ask to see them on a regular basis. A board cannot make good financial decisions without accurate, timely, and decision-useful reports. Contact Holbrook & Manter today for more information on this topic.