Breaking down the numbers: Tune up your board's financial literacy

A not-for-profit organization's board of directors has a mix of talents. You might have an accountant, banker or investment manager on your board. The group also might include business or community leaders with expertise in fundraising, marketing and publicity, as well as in your nonprofit's niche. With such diversity, the question often becomes: How can you best share your organization's financial results with the board members who are not financial experts as well as with those who are?

Your board is responsible for reviewing the nonprofit's financial results so it can make sound decisions. For instance, a board won't want to commit to new or expanded programs unless it's certain that the organization has the means to support it. Thus, every board member should be given the opportunity to examine the numbers.

A statement of financial position (the balance sheet) and a statement of activities (an income statement) are the two financial documents that usually circulate in an organization. Here are some suggestions for making them easier to digest.

Balance sheet

A statement of financial position shows an organization's assets (cash, accounts receivable, and property and equipment), liabilities (accounts payable and long-term debt) and net assets (unrestricted, temporarily restricted and permanently restricted resources). Long lists of numbers can have a dizzying effect on readers. So instead of using a numerical format, employ graphs and pie charts to get the information across.

Using a pie chart to depict assets will show your board at a glance what portion of total assets can quickly be converted to cash (cash equivalents and investments) vs. the portion that cannot (property and equipment). Or, say, you create a pie chart that shows how your annual event was funded last year: money from attendees, sponsors and general funds. This tool can help a board make quicker and better-informed decisions - in this case, guiding them in setting or readjusting their funding expectations this year.

The pie chart in this article, for example, illustrates a nonprofit's breakdown of total assets. At a glance, anyone can see that the organization's cash is the largest part of its total assets and it has a much smaller percentage invested in works of art.

 

Income statements

A statement of activities generally starts with total revenues and support. Then management and general, program and fundraising expenses are deducted to arrive at the overall change in net assets. A bar chart is a good way to present this information: It can compare in a single image current revenues and expenses with those of previous periods. By adjusting the bar graphs on, say, a monthly basis, nonfinancial board members will be able to compare revenues and expenses to the budget on a continuing basis.

Your annual budget assumes a particular level of revenues and support. If you don't obtain certain grants - or if you sell less in program services than anticipated - your board will need to revisit anticipated expenses and make adjustments accordingly. A graphic image, such as a bar graph or pie chart, is one way to relay a "heads-up" quickly.

Ratios

Because of the sluggish economy, many entities have experienced cuts in funding and other contributions. In response, they've had to reduce costs. Comparing the following ratios for the current year to the prior year can reveal whether these costs have been cut appropriately:

• Management and general costs to total support and revenues, 
• Program services to total support and revenues, and 
• Fundraising expenses to total support and revenues.

These ratios allow your board to see if the organization's costs and revenues are in line with its expectations, as expressed, for example, in the budget. Let's say that your management and general costs are $100,000 for the coming year and the total support and revenue for the organization is $1 million. You'd have a highly impressive ratio of 1:10 - 10% of every dollar earned is spent on administrative costs, with the remaining 90% available to fund programs.

Cash flow

With so many nonprofits finding themselves in a cash crunch, you should add another report to your repertoire: a cash flow analysis. You can present your total cash for the period in a simple spreadsheet, as well as anticipated cash inflows and outflows for the coming month. This can help your board make important short-term decisions, such as applying for, or drawing down on, a line of credit.

Getting them all on one page

Consider providing your board with financial training. Bringing in outside speakers, such as investment advisors, bankers and accountants, is a good start. You also may have financially savvy individuals on your board - they may make up a separate finance committee - who are fairly knowledgeable in reviewing and interpreting financial information. These members may be glad to share their financial expertise with the rest of the board, if asked.

Whether it's through a pie chart, a bar graph, a ratio or some other means, there are effective ways to present financial information to nonfinancial board members. Remember, how you present the numbers to the board is just as important as the numbers themselves.

Financial terms

Don't assume that everyone on your board of directors understands financial language. Consider sharing with them these commonly used terms. These descriptions are derived from the Nonprofit Finance Fund's Glossary of Financial Terms: 

Board-designated net assets or reserves: Unrestricted net assets that have a defined use or purpose, as determined by the board. Reserves can be established for many purposes, including emergencies, capital improvements and building replacements, investments in future programs, and internal lines of credit.

Current ratio: Comparison of current assets to current liabilities. Commonly used as a measure of short-term liquidity. A ratio of 1:1 means an organization would have just enough cash to cover current liabilities if it ceased operations and converted current assets to cash.

Liquidity: A measure of how much cash and assets readily convertible to cash (such as marketable securities) an organization has available. Liquidity can include the unused amount available on a line of credit.

Net assets released from restrictions: The transfer of funds from restricted to unrestricted status to satisfy donor-imposed stipulations with respect to timing or purpose of the contribution (or, in rare cases, due to permission of a donor of permanently restricted funds).

Pro forma income and expenses: A statement showing an organization's projected annual income and operating expenses.

Nonprofit's Essential Requirements for Financial Health

Audited financial statements

First impressions

If you want to impress potential lenders and funders, you need to show them that you measure your organization's financial health with care and frequency. Presenting timely audited financial statements upfront can make the difference between being turned down for a loan and getting one.

Annual financial statements, particularly audited ones, present sound measurement of your nonprofit's financial stability. Here are some tips for preparing them:

 

1. Understand your auditor's role. Your auditor is responsible for expressing an opinion on your financial statements. Beyond that, he or she is responsible for obtaining reasonable assurance that your financial statements are free of material misstatements - be it from error or fraud.

Management, on the other hand, is responsible for developing estimates, such as the allowance for bad debts, adopting sound accounting policies, and establishing, maintaining and monitoring internal controls, as outlined in the American Institute of Certified Public Accountants' standards. Although your auditor may make suggestions about these items, it isn't his or her responsibility to institute them or to ensure they're working properly.

What your auditor is required to do is evaluate whether internal controls, accounting policies, and estimates are adequate to prevent or detect errors or fraud that could result in material misstatements of the financial statements. But remember, all decision-making is strictly management's responsibility. If the audit is performed in accordance with Government Auditing Standards, the restrictions on what an auditor should do are even more stringent.

2. Understand the board's role. Sometimes the board of directors' role is overlooked in annual financial statement preparation, and that's a mistake. Keep in mind that the board generally has a strategic and oversight role in the process, which is part of its overall fiduciary duty. But the board isn't responsible for "completing the job." Board members can, however, be a good resource for certain technical matters, depending on their professional background. 

3. Understand statement formats. Annual financial statements are designed to help you manage your organization. Financial statement items - such as debt ratios, program vs. administrative expense ratios and restricted vs. unrestricted resources - can indicate how a nonprofit is doing. So when your organization's leadership team is preparing them, make sure the statements are as user-friendly as possible.

One of the best ways to see the big financial picture is to compare your budget, your yearend internally generated financial statements, and the financial statements generated during the annual audit. This task can be completed more easily if the format of your annual audited statements is similar to that of your internal financial statements and budgets. Keep in mind that audited financial statements may be formatted differently than internally generated reports, so management may need to develop a bridge between the two reports, perhaps in the form of an internal memo.

When reviewing internal vs. audited statements, look for any large differences in individual accounts resulting from audit correcting adjustments - these are often an indication of an internal accounting deficiency. You'll also be able to spot any significant discrepancies between what was budgeted for the year and the actual outcome.

These variances will help you evaluate your nonprofit's performance and plan for the coming year. Also, your financial statements should make it fairly easy to determine which resources are restricted for particular purposes or time periods.

Small Business Health Care Tax Credit

During 2010, Congress passed the Small Business Health Care Tax Credit. If you pay more than 50% of your employees' health care coverage you may be entitled to this tax credit.

            Although the rules state you must employee 25 or less employees and the average annual salary must be less than $50,000, don't assume you don't qualify simply because you employ more than 25 people or you think your average salary is above the limit. The calculation of number of people employed is based upon full time equivalents (FTEs) and certain types of employees are exempted from the calculation. So, if there is a chance you may qualify, complete the census data form and let us make the calculations for you.

           

            For tax years 2010 to 2013, the maximum credit is 35% of premiums paid by small businesses and 25% of premiums paid by eligible tax-exempt organizations.  Beginning in 2014, the maximum credit will increase to 50% and 35% of premiums paid by small businesses and tax-exempt organizations, respectively.

            If you did not pay over 50% of health insurance for your employees in 2010, there is no need to complete the worksheet.  However, you may find it useful to use the worksheet as a planning tool for future years to determine if it is worth-while to begin paying more than 50% of health insurance premiums for your employees. 

            Please feel free to call us if you have any further questions in regards to this new legislation.

Riley and Company, Inc. Announces Two New Certified Public Accountants

Riley and Company, Inc. is proud to announce the designation of two staff members as certified public accounts. John P. Boylan of Tannersville and Katherine Moyer of Shawnee on Delaware recently completed the necessary requirements to attain this prestigious certification. John Boylan is a graduate of Wilkes University and has worked for the firm for over five years. Katherine Moyer is a graduate of Fordham University in Bronx, NY and has seven years of accounting experience.

Riley and Company, Inc. is a full service accounting firm specializing in audits, taxes, payroll and bookkeeping as well as fraud examinations and litigation support.   For further information, please visit our website at www.rileyandcompany.com

Both John and Katherine are members of the firm’s tax department and currently accepting new clients.

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