Confused about what to look for when reviewing financial statements? Maybe a bit intimidated by all the numbers? Well, you are not alone. Many board members don’t really have a framework to evaluate financial reports and may miss important details. You don’t need to have an accounting background or to understand debits and credits to be able to focus on relevant areas. Below are four important areas to look for:
1 – Approve budgets that show most expenses in programs.
Programs are the most important part of a nonprofit and should be the main focus on any budget. If most of the expenses are allocated to administration or fundraising, it may mean that the organization will be launching a new program, or it could mean that the nonprofit lost its focus and needs to re-think its budgets as it relates to programs. If the focus is not on programs, something is wrong.
2 – Always look at the cash on the Balance Sheet/ Statement of Financial Position.
Many boards only review revenues and expenses, but not the cash balances. Cash is indeed king and should be evaluated carefully, as revenues and expenses may or may not show cash transactions, depending on the accounting basis used. If you see $10,000 in income and $1,000 in expenses, but only $100 in the cash balance, you should start questioning how the nonprofit is paying its bills.
3 – Pay attention at variances between actual and budget numbers cumulatively.
As budget vs. actual reports are presented, you should look for small variances in revenues and expenses that may end up becoming large differences after a few months. If revenues, for instance, are below budget by 5% every month, at the end of three months, the cumulative difference could be 15%, and the nonprofit may not have the resources to pay for its expenses as time passes. So, be sure to review cumulative variances as well as monthly ones.
4 – Review tax returns before they are filed.
The IRS promotes the idea of boards of directors reviewing tax returns before they are filed, as the 990, the nonprofit tax form, specifically asks if the board had reviewed the returns. The point here is to make the board accountable. Whether they like it or not, board members are responsible for the 990 information filed.
Check out the book “Nonprofit Finance: A Practical Guide- Second Edition” –– First Edition nominated for the McAdam Book Award