Armanino Blog

Nonprofit Reporting from a For-Profit Perspective

by Grant Lam
November 03, 2014

It’s the classic disconnect—you provide a thorough presentation of your organization’s financials, only to be met with awkward silence by your board. Your financial statement covered it all: change in net assets, fluctuation in cash and accounts payable and a discussion of restricted assets. Yet, eyes are glazed and bodies shift uncomfortably.

It happens all the time. Board members with for-profit backgrounds struggle to comprehend the unique terms and concepts found in nonprofit financial statements. Who could blame them for being confused? The reality is that not all board members are aspiring CPAs. Others with solid experience in finance struggle to wrap their for-profit minds around nonprofit concepts.

The Stakes Are High
Board members and nonprofit executives are required by law to protect their organization’s fiscal health. Board members who do not understand how to read your nonprofit’s statement of financial position or statement of activities, also known as the balance sheet and income statement in the for-profit world, can fall into a number of traps, including:

  • Approving a budget that they don’t really understand.
  • Making staffing decisions without understanding whether or not the organization can afford the new position.
  • Voting on which fundraising approach to pursue without conducting a cost/benefit analysis to determine if that really is the best choice.

Ultimately, executive staff and board leadership must collaborate to make sure that board members are educated and informed regarding financial documents.

Help Your Board Understand Nonprofit Financials
As a nonprofit CFO, your goal isn’t to maximize the earnings for a CEO but, rather, to help your organization achieve mission goals. As a result, your nonprofit’s financial statements are based on a fund management system of accounting.

Each donation or fund source is classified based on the limitations set by each donor or group of donors, and the accounting focuses on how the collections are being used.

By contrast, board members who come from a for-profit background are familiar with a more commercial type of accounting system that computes the company’s gains and losses. Ultimately, nonprofits provide an accurate accounting of their finances because of their accountability to donors rather than for any form of profitability.

Revenue recognition can present challenges, as well. In the for-profit world, revenue is matched with expenses, and the P&L reflects net income and net loss for the year. By contrast, your financial statements focus on changes in net assets. And someone without an understanding of nonprofit accounting could easily get derailed.

For instance, assume your organization received a $5 million donation. At year end, you haven’t used any of the money yet, so there are no expenses associated with it. With $5 million in revenue, your financials would look pretty impressive. An inexperienced board member could very well see that money and say, “Wow, we had a great year. Our net income was $5 million … we should spend that!”

Fast forward a few years to when you release those temporarily restricted assets to the nonrestricted category and begin using the funds toward your charitable purpose. Expenditures begin hitting your expenses without any revenue associated with it. You can see how that same board member could now think, “What happened? We just lost $5 million!”

Ultimately, one of the best ways for your board to gauge operating performance for the year is to focus on the change in your organization’s unrestricted net assets. This measure does a better job of matching revenue and expenses than the temporarily restricted or permanently restricted asset columns, and shows your operation from your core activities.

Eight Steps to Engaging Your Board
Imagine this: Instead of wading through page after page of mind-numbing reports at your next board meeting, you hand your board members an easy-to-read document that tells them everything they need to know about your organization’s financial position. Because of the coaching you’ve provided, they can zero in on key performance indicators (KPIs) that actually mean something to them. With information in hand, your decision makers can do what they do best—make informed decisions.

The reality is that this is what should be happening every time you present your board with financial information. To the right are eight easy-to-implement steps you can take for better engaging your board and ensuring that they receive value from your financial reporting,

1. Understand Your Audience
First and foremost, make sure you know the background and level of expertise of each board member. Are you presenting to CEOs and accountants, or marketing professionals and concerned citizens?

2. Focus on Meaningful Data
Understand what your board finds meaningful—and then report that information to them. For example, the board for a small community arts association doesn’t necessarily need to get into the intricacies of defined-benefit pension disclosures. Instead, the reports you present to your board should be simple and paint the picture they need to see.

3. Turn to Non-Financials
Sometimes that means looking beyond the numbers and sharing non-financial data. For example, you could break your financial data down and share how many individuals your nonprofit fed, or the number of patients it served throughout the year, along with the cost of serving each person.

4. Make It Visual
This sounds simple, but it’s often overlooked. Use charts and graphs to create visual impact when presenting financial information. For example, a pie chart showing your budget broken down by program certainly trumps a page full of numbers. Programs and software such as Microsoft Excel, Adaptive Insights and SQL Reporting Services can help you create colorful, impactful reports.

5. Analyze Ratios
Don’t just report the basics of your financial position. Also show your key operating ratios, such as the ratio of income to expense by program, donor-to-budget ratios and the like. Again, showing these ratios in context has more impact (i.e., how your ratios have changed over time). These ratios can be calculated manually using Excel or using an enterprise resource planning (ERP) tool such as Microsoft Dynamics GP or Intacct.

6. Provide Context
Don’t present your financials in a vacuum. Make your financial data more relevant by presenting it in context. Generate reports that compare current financials to last month or last year, or look ahead using a 12-month rolling forecast that shows actual figures through the current month and budgeted figures for future months. You should also consider benchmarking data that shows how your numbers compare to similar nonprofits during specific time periods.

7. Dashboard It
Use easy-to-read financial dashboards or flash reports to give your key stakeholders a concise, consolidated view of your organization’s financial health. KPIs can run the gamut from financial (net surplus or deficit compared to budget) to staff and board issues (performance evaluations completed on time or attendance at board meetings). In addition, board committees can look at expanded sets of indicators within their own areas. The key is to seek input from the people who use the data the most and then use dashboard technology like BI 360 or QlikView to pull and display the information.

8. Look for Teaching Moments
Having your treasurer read the level of assets and the amount of net loss does not help educate your board members. When presenting to the board, look for teaching moments to illustrate financial points. During a discussion of whether or not to invest in software for a new program, you could bring up how depreciation works, helping board members fully understand the financial impact of their decisions. Plan an agenda for the year and carve out 15 to 20 minutes per meeting to go over some specific accounting items—such as revenue diversification or different types of restricted net assets.

It’s Your Move
Ensuring your board understands your nonprofit’s finances isn’t a luxury. It’s an imperative—not just for the individual board member but also for the good of your organization and the community it serves. In order to fulfill their fiduciary duty, board members need to know why the numbers you are presenting are important, along with what actions they should take.

To help your nonprofit succeed, you and your finance team shouldn’t just track numbers, you should help align finance with the mission. By presenting the right financial and non-financial information to your board and executive team, you’ll give them the actionable insights they need to help mission-critical objectives.

November 03, 2014

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Grant Lam - Partner, Audit - San Francisco CA
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