TSB 016: Success or Failure is in Nonprofit Financial Statements

Read Time: 2 minutes

This week's tip: A targeted review of financial statements can make or break your first 90 days as a nonprofit CEO or Executive Director

Let’s be honest, most of us don’t relish the opportunity to pour over financial statements, but it is the yardstick by which a new nonprofit CEO or Executive Director is measured.

Let’s get right to the bottom line and what every new nonprofit leader should review.

The Annual Report

This publicly available document should be the first a potential or newly selected nonprofit leader reads. It summarizes the organization’s financial position, priorities, programs, major donors and plans for the future.

Identify a few organizations with similar missions and of similar size and review their annual reports in comparison. Notice their major sponsors and the percentage of their funding that goes into programs and providing services.

If a donor-attracting annual or impact report is not available, this should be addressed as soon as possible. Your communications team can be tasked with the responsibility, or you can outsource it.

Statement of Financial Position

This document is typically summarized in the annual report. The details provide insights on your financial position and assets with particular focus on the value of investments and the amount of restricted funds.

You want to make sure that the assets (on the left-hand side) equal the liabilities and equity (on the right-hand side). If not, schedule some time with your financial officer to gain clarity and resolve any discrepancies.

Statement of Cash Flow and Functional Expenses

These two statements together provide a deeper dive into the health of the organization.

Cash flow shows the revenue and expenses for a period of time, and how well the nonprofit is able to meet its obligations. If the net change in cash, at the bottom of the statement, is negative you should schedule time with your financial officer to gain clarity and understand the underlying causes.

Functional expenses describe how the organization used its resources to carry out the mission. It is split into three categories:

1.  Program Services: expenses incurred in carrying out the nonprofit's primary mission and programs.
2.  Management and General: expenses incurred in support of the nonprofit's management and administration, such as salaries and benefits, office expenses, and legal and accounting fees.
3.  Fundraising: expenses incurred in support of the nonprofit's fundraising activities, such as direct mail campaigns, fundraising events, and grants administration.

Many organizations strive to allocate 80% of their resources to Program Services.

Summary

There are other financial reports, like the balance sheet, the income statement, etc., but if you are a non-financial person, start by developing a keen understanding of these four documents.

Once you’ve digested them, you’ll be fully aware of the need to focus on fundraising, operational expenses, debt reduction, or all of the above.

This knowledge, coupled with strong preparation for Your First 90 Days as a Nonprofit CEO or ED, will position you as a leader among your peers.

See you next Saturday.

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