reading financial statements
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Reading Financial Statements and AuditsAmerican Legion Auxiliary – October 3, 2005
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Why do I need to know this stuff?
• Board members are responsible for the organization survival, financial viability, and program success.
Who are members of your nonprofit Board?
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Financial Responsibilities of the Nonprofit Board
• Fiduciary …. A trust held for the greater community. Custodians of something of value to the community.
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Financial Issues Board Members Should Address
• Financial Planningevaluation of existing & potential resourcesexamination of internal & external forces
affecting the organization & fundingexamination of alternatives & their financial
implications
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Financial Issues Board Members Should Address
• Sufficient Available CashMonthly cash projections to determine if there
is adequate cash to cover expenses for the next month.
Annually the budget should outline on a monthly basis the anticipated needed cash.
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Financial Issues Board Members Should Address
• Satisfactory ReservesMost experts recommend one year of
operating expenses.
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Financial Issues Board Members Should Address
• Relationship Between Revenue and ExpensesMore revenue (income) than expenses…
that’s a good thing!!More expenses than revenue…. could be a
bad thing, if you are using a significant amount of reserves… or have no reserves!!
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Financial Issues Board Members Should Address
• Meeting the BudgetQuarterly, at a minimum, the planned budget
needs to be compared against the actual income and expenses.
Address differences to ensure procedures are in place to improve planning and correct where necessary.
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Financial Issues Board Members Should Address
• Propriety of ExpendituresProvide oversight to safeguard against waste
and fraud.Provide oversight of contractual agreements
to ensure organization’s exempt status.Ensure internal control procedures in place
and followed.
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Financial Issues Board Members Should Address
• Insuring Against RisksIs everyone who handles cash, checks, or
investments bonded?Do you carry appropriate insurance to ensure
that the organization can continue to function under adverse circumstances?
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Financial Issues Board Members Should Address
• Meeting Guidelines and Requirements Set by FundersRestricted gifts must be used for the purpose
intended by the donor.Each restricted fund requires a separate
accounting of expenses.
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Financial Issues Board Members Should Address
• Avoiding Conflicts of InterestInappropriate financial gain by staff or
volunteer from the organization.There should be a written and approved
policy prohibiting conflict of interest.
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So……….
In order to fulfill those responsibilities …..
you need to know how to read financial statements and audits!
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Understanding Nonprofit Financial Statements
• Statements of Financial Position ……..AKA Balance Sheet
Summarizes assets, liabilities, and net assets at a point in time (end of month, quarter, or fiscal year normally).
Total assets “balance” with the sum of liabilities and net assets (AKA Fund Balances).
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Understanding Nonprofit Financial Statements
• Statement of ActivitiesSummarizes revenue and expenses within
each “fund” during the period being reviewed.
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Understanding Nonprofit Financial Statements
• Statement of Cash FlowsCategorizes revenue and expenditures based
on three types of activities: operating, investing, and financing.
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Understanding Nonprofit Financial Statements
• Annual Financial StatementsIndependent auditor’s reportStatement of financial positionStatement of activityStatement of functional expensesStatement of cash flowsNotes to financial statementsSupplementary information if needed
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Understanding Nonprofit Financial Statements
• Independent Auditor's reportBy law, must be done by outside certified
public accountant, with financial information provided by organization.
Includes a letter to the Board describing their analysis of the fairness of the financial statements and if they conform to generally acceptable accounting practices (GAAP).
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Understanding Nonprofit Financial Statements
• Independent Auditor's Report will also include:Notes to Financial StatementsSupplementary informationManagement Discussion and Analysis
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Understanding Nonprofit Financial Statements
• Board Response to AuditThe auditor reports to the Board not to the
staff. The Board hires the auditor to provide an
independent oversight & must ensure that the auditor works for the Board.
The Board should discuss the financial statement with the auditor & ask about any unusual situations or questionable figures.
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Purchasing Financial Software
American Legion Auxiliary – March 1, 2006
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Where to start????
• You need to analyze to what detail is the tracking and reporting you need.The more “restricted” income streams you have the
more requirements for tracking.• Know how many transactions (deposits &
payments) you make each month.• Determine the expertise level of staff who will be
using software.• Understand the capacity of your hardware for
software requirements.
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How to select software
• Talk to: your auditors about their experience and
what they would recommend to meet your needs.
other organizations, about the same financial size, to get suggestions.
college instructors who teach financial classes.
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How to select software
• Experiment with trial packages online at vendor sites.
• Visit www.findaccountingsoftware.com and search for “nonprofit accounting”.
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Resources
• BoardSource www.boardsource.org• National Council of Nonprofit Associations
www.ncna.org– State organizations for the nonprofit sector that
often have workshops & other materials.
• Wiley www.wiley.com• Jossey Bass www.josseybass.com• Pfeiffer www.pfeiffer.com