Last week, I taught one of my favorite courses, "Understanding the financial status of your non-profit organization: a hands-on workshop for board members." I have asked students to submit the latest financial reports they received from their board of directors. A student, a smart, well-behaved woman, recently joined a non-profit committee and submitted a seven-page budget to me detailing the income and expenses for the month, with the budget for the month. Compare and compare the comparisons for the year. The latest budget compared to the previous year.
The new board member told me that "no one on the board understands this. However, when the executive director asked questions, no one responded, so we continued to discuss the next item on the agenda."
I told her that I understood her frustration because she spent a lot of time on her budget… and I still don't have enough information to fulfill my financial supervision as a board member. Budgeting can be an important planning tool that helps the board understand where they may overspend or where they are under-resourced. However, the detailed budget is the management tool for executive directors and financial managers.
The budget usually includes only the operating income and expenses of the non-profit organization. Board members are responsible for overseeing the overall financial position of non-profit organizations [operations, land, property, and equipment] and need to understand the overall situation, rather than the organization spending an additional $50 on supply this month. Board members need to review two key reports each month to truly understand the financial status of their non-profit organizations.
In the for-profit world, this is called a balance statement, and many non-profit organizations use the term [especially if they use for-profit software to record financial transactions]. This report is a snapshot of the non-profit organization's budget for a specific date. The key person in auditing this report is “net assets”. Commonly referred to as "fairness" in the business world, this number tells you the total value of your organization on a particular date, the value of a non-profit business.
A few years ago, when I was working with a non-profit organization board that only received budget reports, I asked a question: "If you close the door tomorrow, how much will you have in the bank?" No one knows, and everyone Surprised that the organization's net worth is $3 million, most of which is the property they own, but there is a lot of cash. At the previous meeting, board members discussed how to reduce office supply costs because the project in the budget exceeded $200. It's no wonder that the board and staff believe that the meeting time is too long and too focused on the details.
In the for-profit world, this is often referred to as the income statement. This report focuses on income and expenses for a specific time period, and board members should receive revenue and expenses for the previous month at each meeting. Unlike budgets, income and expenditure are summarized in the general category. The key figure identified here is “Net Asset Change”, which shows the profit or loss for a particular month. This is the bottom line to be aware of because it tells you whether a particular month is making money or losing money.
Given the importance of focusing on the overall financial situation, I recommend that the board receive a year-to-date income statement as this will show a larger picture and let you know if your nonprofit has generated enough revenue to pay for it. There may be losses in some months, depending on when you conduct annual fund activities or when you receive a grant, but the total should be positive.
If you receive and understand these two reports monthly as a board member, you can provide good financial oversight for your nonprofit organization. Does this mean that your organization does not need a budget? Absolutely not! The board of directors needs to approve the employee's annual budget as a guideline for managing the business in the coming year. The Finance Committee should receive a streamlined budget to actual reports at least quarterly, and the Board can obtain a summary of the current year's budget before it begins to prepare for the next year's budget. Remember that budgeting is a planning tool and financial reporting reflects the full financial position of a non-profit organization.
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