I first encountered nonprofit financial statements about 40 years ago. I was on a board and they gave us these strange reports each month. We were supposed to review them and ask questions. I didn’t know enough to ask questions. I vowed to myself to learn how to read these reports that only an accountant could love.
I am pleased to report that I did learn how to read these reports. These days I can jump from client report to client report and understand what the reports are trying to tell me.
There was an insurance company owner on that first board. He clearly understood the reports, and he would zero in on a funky number and ask about it. I marveled at his skill. Eventually, I found I could do that too. It comes out of having a feel for the big picture, and more importantly, comparing numbers against the previous year.
From my perspective, the two most important reports are the Balance Sheet (Statement of Financial Position) and the Profit/Loss (Statement of Activity.) The latter terms are often used by non-profits, but the reports are the same.
I prefer to review these reports against the previous year. If the two are radically different, then that is a good thing to ask about. These reports say Comparison in the header.
On the Balance Sheet, there are few numbers that are key to know. Cash assets are the money you have in the bank. Investments are generally thought of as reserves.
Another important number is Deferred revenue. That is the money that has come in for the next year. Deferred expenses are expenses for the next year that you have prepaid. At the bottom you will see Equity (second line up from the bottom.) That is the value of your Assets minus your Liabilities. That is an important number to know. Is it getting smaller or larger?
The Profit/Loss statement has lots of good information. Under Income, pay special attention to dues, sponsorships and donations. Are they up or down a lot from the previous year?
Under Expenses, there will be a list of items. Look at the difference from the previous year. Does anything look like a cause for concern?
I think the most meaningful number is Net Operating Income (income minus expenses.) If that number shows a minus sign or has parentheses around it, it is a loss. Check the next column over to see if it is larger or smaller.
Down below that section, there is Other Income and Other Expenses. That is where investment income is posted. Sometimes groups will take their interest out and add it to next year’s budget. The next to the last line is Net Income. That is an important number for obvious reasons, but less under the group’s control than Net Operating Income.
What I have shared is just a fraction of the information that is included in financial reports.
You may say why give us such complicated reports? Can’t you simplify it? We can pull out the key numbers that I have referenced, but it is important that you have the actual reports. The reports are generated using QuickBooks or the accounting software used by the organization. When reports come directly from QuickBooks, they can’t be modified. It is easy to make a mistake and this strategy reduces that likelihood. This also eliminates the possibility of deliberate misstatement.
It is important not to let your eyes glaze over. Instead, go to the key numbers and focus on understanding them. The rest will fall into place.
