1. Effective Approaches to Keeping Boards and Partners Well Informed
Financial Reporting
Effective Approaches to Keeping Boards and Partners Well Informed

2. Topics Covered 1. Board and Staff Expectations
2. Review of Key Financial Terms
3. Review of “Nonprofit Accounting” Principles
4. Presenting Information to the Board
5. Presenting to Board Committees
Finance Committee
Investment Committee
Audit Committee

3. Board Expectations of Staff
The Board of Directors has legal responsibility for the organization’s work, for short and long term planning and must ensure that systems are in place for effective use of resources and guarding against misuse. To this end, information provided by staff should be:
1. Accurate: Information must be reliable and accurate. Resolving questions about the quality of recordkeeping or accounting is a top priority of the Board,
2. Timely: Information should be available to the board within two months at the latest. When meeting to discuss interim financial statements, the statements reviewed should be for the previous month. Try to schedule board meetings during the 3rd weed of the month.
3. In Context: Information should be presented in relationship to the history, goals and programs of the organization,
4. Appropriate: The reporting format needs to match the knowledge level of the board members.
Meetings should be scheduled during the 3rd week of the month
Interim statements should contain budget data and cash flow projections

4. STAFF EXPECTATIONS OF THE BOARD
Resources: That the Board has provided resources for an adequate accounting and bookkeeping system,
Treasurer: That the Board treasurer is knowledgeable about the organization’s financial affairs and understands his/her role as defined by the bylaws,
Board Chair: That the chair has provided for sufficient training of board members to ensure that members understand their proper role as a board.
Committees: That the board has established the required and proper committees needed to manage the organization’s financial affairs.
1. Computer, accounting software, bookkeeper or accountant

5. WHAT EVERY BOARD NEEDS TO REVIEW
Financial reports should be on the agenda at every board meeting. The board should regularly review:
Income/Operating Statement – showing income and expense for the period compared to budget,
Balance Sheet – showing the assets, liabilities and net assets
Cash Flow Projection – future impact of operations upon cash balances
In addition, once a year the board should:
Review and approve the annual budget
Review the Annual Financial Report and Audit (if required)
Ensure that the IRS 990 information return has been filed

6. REVIEW OF FINANCIAL TERMS – BALANCE SHEET
Assets: What is owned by the organization
Current Assets - assets that could be expected to be available as cash within 12 months. Examples: cash equivalents and receivables
Fixed Assets - assets with a relatively long useful life. Example: equipment, furniture, buildings & land
Other Long-term Assets – examples are endowments and pledges to be paid over more than one year
Liabilities – What the organization owes to others
Current Liabilities – liabilities payable within 12 months (invoices, payroll)
Long-term Liabilities – obligation with a due date of longer than one year (loans)
Net Assets: The difference between total assets and total liabilities
Unrestricted Net Assets – accumulated operating surpluses from prior years and gains on restricted investments.
Temporarily Restricted Net Assets – funds limited by donor stipulations that can be met by the organization or expire over time (grants and term endowments are typical examples)
Permanently Restricted Net Assets – a donor has stipulated that these funds must remain intact into perpetuity (endowments)
Other terms commonly used to define net assets are net worth and fund balances

7. OTHER FINANCIAL TERMS
Accrual-Basis Accounting – transactions are recorded as expenses when they are incurred and when income is earned rather than paid and received.
Cash-Basis Accounting – transactions are recorded when cash is received or spent.
Operating Statement – a financial report that summarizes income and expenses for a given period of time.
Restricted Funds – contributions restricted by a donor or grantor for a specific use.
Unrestricted Funds – contributions given without restrictions as to use.
Working capital – funds that are not invested in fixed assets or obligated to pay current liabilities but are available to fund day to day working needs. (current assets less current liabilities)
If a donor or grantor makes a gift with the expectation that it will support a specific program or project, it should be treated as a restricted fund contribution .

8. OPERATIONAL FUNDS FOR A NONPROFIT ORGANIZATION
REVIEW
Unrestricted Operating Funds – Income and Expenses for which no there are no donor restrictions as to how the funds are expended.
Temporarily Restricted Operating Funds – Income and Expenses that are donor restricted (examples include grants for specific operating programs or a specific purpose such as annual scholarships)
Permanently Restricted Operating Funds– contains funds that donors have stipulated be maintained in perpetuity such as endowment funds

9. REVIEW OF NONPROFIT ACCOUNTING PRINCIPLES
“Extensive financial experience with a for-profit organization generally does not adequately prepare a board member for interpreting non-profit financial statements”.
One of the principle differences in nonprofit financial statements compared to for-profit entities is that the overall objective of a nonprofit is to realize its socially desirable goals and objectives for the community it serves rather that realize a net profit.
Nonprofits can only serve their goals and objectives if they have sufficient cash to provide for various programs. This dependence upon cash flow has created a heavy responsibility to account for the resources they have. Donors want assurance that their donations are used for their intended purpose.
A fund for accounting purposes is described as a discrete entity with a self-balancing set of accounts and operating much like a separate business. Each fund is segregated for the purpose of tracking activities in accordance with limitations or restrictions attached to the fund. Examples of such funds are:
Unrestricted and Restricted Operating Funds
Plant Funds
Unrestricted and Restricted Endowment Funds

10. Review of Nonprofit Accounting (continued)
Today, reporting financial activity by funds has been replaced by the Statement of Financial Accounting Standards 116 & 117 which describe the way non-governmental nonprofits should present their financial statements.
The impact of the SFAS reporting is now on “net asset” classifications rather than tracking each fund. Nonprofits can combine all funds with similar restrictions for reporting purposes and no longer have to track each fund on their annual financial statements.
Because of the complexity if the SFAS standards, many nonprofits choose to use traditional fund accounting for presenting interim financial statements to boards and other constituencies.
Quickbooks is the preferred accounting software for most smaller nonprofits because of its ease of use and cost but it isn’t designed to produce all of the reports for nonprofits that adhere to SFAS and GAAP (Generally Accepted Accounting Principles). If you are using Quickbooks, you will need to use spreadsheet applications to provide full financial reports and tax returns.

11. SAMPLE NONPROFIT (FASB) OPERATING STATEMENT
Temporarily
Permanently
Unrestricted
Restricted
Revenue, Gains, and Other Support
Memberships
60,000
Endowment Contributions
300,000
Annual Fund Contributions
100,000
Government Grants and Contracts
130,000
Endowment Investment Income or (loss)
90,000
Other Investment Income
3,200
Other Grants and Contracts
20,000
Total Revenue, Gains & Support
183,200
220,000
Net Assets Released from Restrictions
Purpose Restrictions Accomplished
150,000
(150,000)
Endowment Income Realized Under Spending Policy
120,000
(120,000)
Total Net Assets Released From Restrictions
270,000
(270,000)
Total Revenue & Assets Released From Restrictions
453,200
(50,000)
Expenses:
Compensation
40,000
Facility Rental
24,000
Facility Maintenance & Utilities
12,000
Program Expenditures
230,000
Total Expenses
306,000
Increase or (decrease) in Net Assets
147,200
Net Assets - Beginning of Year
330,000
1,560,000
2,000,000
Net Assets - End of Year
477,200
1,510,000
2,300,000
Can be confusing

12. Sample Revised Operating Statement

13. SAMPLE NONPROFIT (FASB) BALANCE SHEET
Where is this cash?
What are these rec. intended for?
Difficult to tell what these net assets represent

14. SAMPLE BALANCE SHEET REVISED – ALL FUNDS

15. REPORTS NEEDED BY YOUR BOARD TO KEEP INFORMED
Operating Statement by Account – showing income and expense for the period compared to budget
Operating Statement by Program
Balance Sheet – showing assets, liabilities & Fund Balances
Cash Flow – projecting the flow of cash 8 – 12 months in the future
Budget – approved annually before the start of the fiscal year
Annual Financial Report and/or Audit
IRS 990 Information Return
Pro-forma’s for major financial decisions

16. PREPARING FOR BOARD FINANCIAL PRESENTATIONS
Invest time creating report formats using accounting software or spreadsheet programs
If you don’t have an accounting background, there are several options
1) Engage your bookkeeper or accounting firm as a special assignment
2) Engage a knowledgeable volunteer
Keep in mind that your interim financial reports can be presented in any format as long as they depict accurately your financial operation.
Keep your financial as simple as possible
If you have been given restricted contributions or grants, be sure that your accounting system can track how these funds are used. Include a programmatic income statement and present your balance sheet by funds.
Use summary income and expense categories to enable your board to focus on the big picture rather than managing day to day details.

17. PRESENTING FINANCIAL STATEMENTS (continued)
Always provide a narrative to accompany the reports. The Narrative should reference each report and highlight significant items and variances from plans.
Place the reports in the hands of your board at least four or five days in advance of the meeting.
Contact your board treasurer or chair to see if there are any questions

18. Suggestions for Keeping Interim Financial Statements Simple
1. Consider excluding the recognition of fixed asset depreciation as an expense on your financial statements. Depreciation is not of consequence in nonprofit accounting.
2. If you are carrying debt, and excluding depreciation, include the payment of both principal and interest as line item expenses in your statements.
3. If you have an endowment large enough to provide significant operating revenue, treat it as a separate fund rather than co-mingling it with other assets. Variances in market values tend to distort other operations.
4. If you are running an unrelated operation that will pay income taxes on any profits, prepare separate financial statements for that operation.
5. If your organization operates a number of restricted grants, consider preparing two operating statements – one by account and the other by program.

19. SAMPLE OPERATING STATEMENT BY ACCOUNT (overview)

20. SAMPLE OPERATING STATEMENT BY PROGRAM

21. SAMPLE BALANCE SHEET BY FUND

22. SAMPLE CASH FLOW PROJECTION

25. Explain large variances

28. ROLE OF THE BOARD FINANCE COMMITTEE
Budget Planning
Fiscal Policy Recommendations
Discuss Financial Statements in Detail including the Annual Audited Statements
A finance committee isn’t needed if the board as a whole can understand the financial information, provide guidance, and make financial decisions efficiently.
A finance committee might be crucial for nonprofits with many complex funding sources and/or use loans, bonds, or other financing.

29. REPORTS FOR SPECIAL SITUATIONS
Planning
Taking Action

30. PLANNING
When the Board is engaged in planning in order to project future needs and prospects for the future, the board should receive:
1. Trend analysis of primary income & expense categories for past 1 – 3 years.
2. Information about the external environment and how it is affecting the organization.
3. Financial implications of new programs & decisions ( 3 – 5 year financial forecast)
4. Multiple budget scenarios based on different options under consideration

31. 1. The income statement compared to budget and plans,
TAKING ACTION
Sometimes, boards will be required to take action based upon variances from original plans. The board should receive:
1. The income statement compared to budget and plans,
2. An analysis as to the causes of the variances,
3. Multiple scenarios based on the various options under consideration

32. IN TIMES OF DIFFICULTY OR FINANCIAL CRISIS
During times of difficulty, the board will want to keep a closer watch over the organization’s operations. You will need to:
1. Provide more detailed information
2. Report more frequently
3. Update forecasts on a regular basis
4. Manage cash flow vigilantly – increase the amount of detail included.