Nonprofit board members come to the table with knowledge and skills useful to support and promote a cause dear to their hearts. However, cash flow, balance sheet, and income statement are foreign terms. Many board members do not know the first thing about reading financial statements while others simply are uncomfortable do so.
To assist board members in becoming more comfortable when reviewing their organization’s financial statements take the following steps:
- Board members should receive financial statements at least 7 days before the board meeting to provide ample time to review them.
- The financial statements should contain actual and budgeted information in the balance sheet, the income statement (statement of activities), and statement of cash flow. If possible, also include key rations and explanatory notes.
- New board members should spend 2 hours with the organization’s chief financial officer to understand the critical elements of the organization’s financial statement.
- Have the organization’s external auditors attend a board training session and offer their input.
In reviewing the financial statements of your organization there are ways to use the information to determine the status of the financial health of your organization. Some key ratios that measured monthly include:
- measures the number of dollars held in current assets as a percentage of the number of dollars owed in current liabilities. A current ratio of 1.0 means that the organization has exactly enough current assets to payoff its current liabilities. Organizations with ratios between 2.0 and 4.0 are considered financially solvent, having double to quadruple the financial means to payoff their short-term liabilities.
Current ratio = Current Assets
Days Cash on Hand
- most important of the ratios, it measures the number of days of average cash expenses that the organization maintains in either short-term sources or all sources. The higher the value the better the performance.
Days Cash on Hand may be calculated in the following equations:
Days Cash on Hand (Short-Term Sources) =
Cash = Short-term Investments
(Total expenses – Depreciation)/365
Days Cash on Hand (All Sources) =
Cash + Short-Term Investments + All Long-Term Investments
(Total Expenses – Depreciation)/365
Key Financial Statement Definitions
- Assets: Things that we own (cash, securities, accounts receivable, inventory, long-term fixed assets)
- Liabilities: Things that we owe (accounts payable, mortgages, notes payable, bonds payable)
- Net Assets: The difference between assets and liabilities
- Income: Revenues from operations or grants, gifts, and bequests
- Expenses: Costs incurred in the operations of the business
- Financial results: The difference between income and expenses
Board members may apply many other ratios to the financial statements of an organization. It is the fiduciary responsibility of each board member to oversee the finances of the organization. This is a critical element for the board and the long-term success of the nonprofit organization that they serve.
Understanding Nonprofit Financial Statements
, Steven Berger, CPA, Board Source, 2003.