We are inundated with data in our world today. Being able to sift through this data to understand it and, more importantly, to take action from it is critical to your organization's ultimate success. But, where to start? Sometimes it can feel like your drowning in information which is why you need to be able to break it out into more meaningful chunks.
Nowhere is this more important than when analyzing the financial health of your organization. You need to see and understand the numbers so that you can make intelligent business decisions grounded in fact. To minimize the chances of fraud, a greater understanding of your financial situation is imperative to operating good risk management and internal controls. While there are a multitude of financial reports available, a few reports stand out as must haves for every nonprofit organization.
Here are four key financial reports every CFO needs to understand and use:
- Statement of Cash Flow
- Statement of Financial Position
- Statement of Activity
- Statement of Functional Expenses
What information do these reports provide? Below is a brief description.
Statement of Cash Flow
A Statement of Cash Flow is critical to monitor the availability of cash throughout the year. Your cash flow statement will show you the source and usage of your funds. Because there are often complex reporting requirements related to grants and other income streams for nonprofits, the cash flow report must take into account available funds for operating expenses but also recognize any funds that are restricted.
This statement shows the actual flow of money and how much cash is available to pay expenses. This is particularly important for nonprofits that earn a significant amount of their revenue during specific cycles, but have constant expenses throughout the year. The ultimate purpose of the Statement of Cash Flows is to assist you in managing cash flows to meet your obligations.
Statement of Financial Position
The Statement of Financial Position, also known as the Balance Sheet, summarizes the financial health of an organization (assets – liabilities) and the resulting net asset ratio. The net assets section typically consists of a breakdown for unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. The breakdown is based on donor restrictions and can offer a more realistic view of special circumstances placed on available funds.
Statement of Activities
In the for-profit world, the Statement of Activities is known as the Income Statement. This report shows you revenue and expenses. The report can be organized by key factors, such as cost centers relevant to your organization, allowing you to compare how you are doing this fiscal year versus previous ones. With this report, you can also review your current numbers against your budget either for your overall organization or segmented by program, department, grant or any other segment in your chart of accounts. The Statement of Activities enables you to see trends in revenues or expenses over time allowing you to make adjustments as needed and provides your key personnel information to make good analytical decisions.
Statement of Functional Expenses
This nonprofit specific report is in a matrix format that breaks out natural expenses (salaries, supplies, telephone…) by functional activity: (program, management & general, and fundraising). The reader of this report will receive a clearer view of your activities, for example, expenses incurred that are program related versus administrative. With this report, you can determine the ratio of these expense categories, which can help measure the efficiency and balance of your nonprofit expenditures.
Whatever you identify as your key financial reports, it is critical that you are able to report on your data in a way that allows you to take action towards strong financial health for your organization and ultimately provide clarity to your Board and donors.
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