What’s the Most Important Thing for a Leader to Know About Financial Reports

ne of the most rewarding angles of our partnership with nonprofits is working closely with the leaders in the organization to understand what the numbers on those monthly financial reports mean for the present and the future.

In this article, we will focus on the key points that each leader should pay close attention to and what they might mean.

The three key reports are the statement of financial position, statement of activities (typically presented as a budget to actual in monthly reports), and statement of cash flow.

Statement of Financial Position

This report will give a picture of the organization’s overall long-term health.

I like to include a comparison to a previous period, such as prior fiscal year-end or the same period in the prior year. This comparison with help you focus on variances, either increased or decreased, immediately. Below are key accounts you should watch:

Cash (of course it is king):

Is your cash below a prior year balance. If so, why?

• Did your organization receive multi-year funding that you are spending throughout this next year?
• Are your expenses higher than in prior years?

Accounts Receivable:

Is your receivables balance higher than the prior year? If so, why?

• Are your customers or funders slow to pay?
• What is the age of the receivables?
• What is the combination of your cash and receivable balance? Is that like prior years?
• An increase in accounts receivable could mean a decrease in cash

Accounts Payable:

Is your accounts payable balance higher than the prior year? If so, why?

• Are you paying invoices closer to due dates than the prior year?
• Do you need to hold invoices to hold on to your cash balance longer?
• Are you spending more than in previous years?

Net Assets:

Is your net asset balance lower than the prior year?

• Is your cash balance lower and your accounts payable balance higher than prior years? If so, will this have a negative impact on your net asset balance?
• Have you received multi-year grants? This could inflate your net asset balance in the year of award and will decrease your net asset balance as you “spend” against that grant.
• Do you have restricted net assets. If so, is your cash balance greater than the restricted balance? If not, then you are spending restricted funds on unrestricted purposes.
• Do you have an adequate reserve balance?

Statement of Activities or Budget versus Actual:

This report provides a picture of the organization’s current fiscal year revenue and expenses.

I typically include the approved budget for comparison purposes. This comparison will help you key on variances to what you anticipated during the budget process. This report can also be the guidance for creating rolling forecasts for planning and decision-making.

As an organizational leader, we suggest setting a variance threshold, such as 10% or 20%, both over and under budget. This variance, or materiality, might be different for each organization and circumstance. Conditional formatting can be added to reports that will highlight accounts based on the threshold.

Questions to Consider When a Line Item is Over or Under Budget

• Is it a budget timing issue?
• Is it an error in the classification of the income or expense item?
• Was it a planned item that was budgeted but not necessary or delayed, such as a replacement software package or equipment replacements?
• Was it an item that was not budgeted but was necessary, such as equipment replacements or marketing opportunities that lead to increased revenue?

Understanding these variances and addressing them quickly is key to changing course if revenue is under budget and expenses are over budget.

Statement of Cash Flows:

This report will you give you a picture of your month’s cash changes.

The report adjusts your accrual net income or loss to cash. In additional to the Cash Flow Statement, a Cash Flow Forecast is maybe even more important, and certainly meaningful, for planning and decision-making.

Create a rolling forecast. I like to use the budget versus actual report and present the cash flow forecast using that same forecast, but factor in the resulting monthly increase or decrease to cash. It is necessary to make adjustments to accrual entries that delay cash in or out, such as accounts receivable, accounts payable, and deferred revenue.

Understanding the important data items on each report will assist leaders in making efficient and effective decisions. In addition to understanding the data, leaders must receive reports that are timely and meaningful.

If you are struggling with the preparation of reports, understanding the data, or are not receiving reports in a meaningful format please contact us, we are excited to help you.