Understand the Basic Financial Statements for Non-Profits

Each month a non-profit executive director will prepare basic financial statements for the board or finance committee to review. The statements need to be approved following the reporting process outlined in the organization’s policy. It is rare for a board to approve the monthly financial statements without first asking a handful of questions.

Ask questions to fix errors and expose fraud.

It is the board’s obligation to act in the best interest of the non-profit. Asking questions about financial statements will help the board to determine if the information they’ve been given is current, if the budget they approved is being followed, and what financial position the organization is in (e.g., surplus, deficit). Without asking questions, the board will be operating without basic foundational knowledge which may put the organization at risk for financial mismanagement, or worse.

Questions for the 6 core reports.

Financial reports seem intimidating at first, but the board, or finance committee, can use the following descriptions of each monthly financial report and accompanying questions to get started.

Note: I’m not an accountant. These definitions and details are my own creation based on my experiences. If you receive different information from your auditor or a financial professional, I strongly suggest you use those recommendations.

INCOME STATEMENT

The Income Statement is a summary of revenues and expenses grouped by the categories and subcategories of the organization’s Chart of Accounts. Usually, a Chart of Accounts is set-up to mirror the operations plan. This makes the Income Statement easy to match to what is happening with programs and services.

The Income Statement is essentially a financial snapshot for a specific date range. When providing a monthly Income Statement, it helps to start from the beginning of the fiscal year and include everything until the end of the month being reported.

The Income Statement, essentially one big math column, ends with a figure that shows the organization’s surplus/deficit. A surplus or deficit is determined by taking the total revenues and subtracting the total expenses.

• A Surplus means there are more revenues than expenditures
• A Deficit means there are more expenditures than revenues

Other Names: The Income Statement is sometimes referred to as the Statement of Operations or a Profit and Loss Statement.

Board members can ask these questions to better understand the Income Statement.

• Where is most of the revenue coming from?
• What expected revenue has not yet been received?
• Is the organization spending its money as outlined in the budget?
• Are there expenses that seem unusually high/low?
• Are salaries in line with the budget plan?
• What are the different programs being offered and do their expenses seem appropriate?
• Are there any line items that are unclear?

BALANCE SHEET

While the Income Statement reflects revenues and expenses for a specific date range, the Balance Sheet is a cumulative report of the organization’s operations over many years. The Balance Sheet doesn’t use the same groupings as the Income Statement. It looks at the organization’s bigger picture, the assets and liabilities.

• Cumulative means the results of the organizations revenues, expenses, and surplus/deficit added up for all years of operation
• Assets are something the organization owns or expects to receive
  • Cash in bank accounts
  • Office equipment
  • Buildings, vehicles
  • Refunds expected
  • Payments the organization is waiting to receive
• Liabilities are something the organization owes
  • Bills to be paid
  • Revenue earmarked to be used next year (also called deferred revenue)

Board members can ask these questions to better understand the Balance Sheet.

• Do any bank account balances seem unusually high/low?
• From whom is the organization waiting to receive money?
• To whom does the organization owe money?
• Does the organization have a surplus or deficit, and if so, is it appropriate for this point in the operating year?

CHEQUE LOG

The Cheque Log is a list of all cheques written for the specific date range being reported.

Board members can ask these questions to better understand the Cheque Log.

• Do the cheque numbers for the current month begin where the previous month’s cheque numbers finished, if not, why?
• Are the names of the payees recognizable?
• Have any cheques been voided/reversed and why?
• Have any of the cheques been printed more than once?
• Do any of the cheque amounts seem out of line with normal daily operations?

ACCOUNT RECONCILIATIONS

Most organizations have multiple bank accounts and each one lists a series of transactions for a given month. Doing an Account Reconciliation is important to be sure all transactions that pass through a bank account match all the transactions that have been recorded in the accounting system.

Account Reconciliation is the process of matching up the two lists of transactions and correcting any errors until everything matches perfectly. Once the matching-up process is complete, an Account Reconciliation Report is created for each bank account.

Bank statements are issued monthly, so Account Reconciliations are usually completed monthly. It is wise to complete reconciliations within 1-3 days after bank statements arrive. Dealing with errors quickly will ensure they don’t snowball into one big problem only an auditor can sort out.

Board members can ask these questions to better understand Account Reconciliations.

• Was a reconciliation completed for each bank account?
• Does the reconciliation cover the dates for the full month being reported?
• Does the reconciliation begin the day after the previous month’s report ended?
• What was the date the account reconciliation was completed?
• Are there any outstanding transactions and why?

GENERAL LEDGER

Remember the categories and subcategories of the Chart of Accounts that your read earlier? The General Ledger reports each and every transaction for each and every account code, in chronological order. The General Ledger records mistakes and corrections.

The General Ledger is very helpful because it remembers every transaction right down to the tiniest detail. This is a huge help when trying to figure out a problem or error that happened months ago. No need to rely on memory, the General Ledger (also called a GL) will record everything.

A word of caution, the GL can be very long. To avoid overwhelming report readers, it is usual to provide General Ledger Reports for only one month at a time, unless requested.

Board members can ask these questions to better understand the General Ledger

• Do the transactions attributed to each account code seem appropriate for that category?
• Are the names of the payees recognizable?
•  Do any of the transaction amounts seem out of line with normal daily operations?

BUDGET

Budgets reflect the appropriate and prudent plan for using organization funds. Think of appropriate as meaning funds used in accordance with the strategic plan, mission, vision, operational plan. Think of prudent as meaning paying fair market value for goods/services and compensation in accordance with industry standard and policy.

A budget is a road map for the operating year. It will indicate revenue, expenses, and how much may be left over at the end of the year.

Budget Reports can be either part of the Income Statement Report, or a stand-alone report mirroring the categories and subcategories of the Chart of Accounts.

Board members can ask these questions to better understand the Budget

• Are there enough funds to carry out the work planned for the operating year?
• Are there significant differences between budget plans and previous year’s results?
• What scenarios were considered in the budget planning process?
• Is there a clear plan for staffing changes and compensation?
• Is the budget in line with the strategic plan?
• How much of a cushion does the organization have against adverse events?

Customize questions as skills develop.

While there is no perfect solution to protect a non-profit from risk or fraud, board members can develop a set of tools to help with the task. A standard list of questions to ask when reviewing monthly financial reports is a great place to start. Over time, the questions can be customized to better fit the organization, and to recognize new questions board members would like to add.

Copy/paste questions into your own cheat sheet.

Board members can copy/paste questions for financial reports into a cheat sheet to use each month. Leave a little room after every question to jot down answers and put a big star by the answers where clarification, or more detail, is needed. Ask questions at the monthly board meeting or following the review policy the organization has developed.

When a board member wants to understand the full picture provided in the monthly financial reports, relying on a standard set of review questions can build committee confidence until a custom set of questions can be developed.

Thanks for taking the time to read my ideas. My mission is to take the mystery out of running a small non-profit. If you know someone who needs to read this, why not grab the link, and share it with them. Let’s work together to make monthly financial reports less intimidating.

-Christie

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Hi, I'm Christie Saas, former board member, current Executive Director, and non-profit volunteer. I remember well, those early years when I lacked the training, the confidence, and the work-life balance to focus on becoming the best non-profit leader I could be.

Fast-forward past many bumps in the road, lessons learned, and you’ll find me still in the trenches, but a little wiser, a little calmer, and a whole lot happier. I love my work and I want to help you love yours too.

I created ChristieSaas.com so non-profit leaders never need to feel alone. I’m here to help. If you’re a brand-new non-profit leader, or a little more seasoned, someone who’s looking to make a meaningful contribution and still have time for a full life away from the job, you’re in the right plac

© Christie Saas 2022 All Rights Reserved

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