Financial Management for Emerging Leaders

Each year, Nonprofits Assistance Fund facilitates a session on nonprofit finance for MCN's Emerging Nonprofit Leaders Network.  Read the notes from last year and share your thoughts and ideas in the comments section.

Notes from Financial Management for Emerging Leaders

The two most essential financial statements are the balance sheet and the income statement.  They complement each other and go hand in hand. 

Income Statement

The income statement tells a financial story over period of time, usually over 12 months. It summarizes all financial activities, breaking the information down by by income and expenses.  An income statement can also be referred to as a statement of activities or P & L (profit & loss).

Generally Accepted Accounting Principles (GAAP) dictate what can appear on audited income statement. 

  • GAAP:  The set of norms and standards of nonprofit accounting practices established by the Financial Accounting Standards Board (FASB) to help ensure the accuracy and consistency of financial records and reports. 

Income

  • Support/Contributed Income
    • Individual Contributions
    • Corporate and/or Foundation Grants
    • In-kind Contributions: Goods or Services
  • Revenue/Earned Income
    • Client Fees
    • Contract Income
    • Interest Income
In-Kind:
  • GAAP rules determine what qualifies as in-kind contribution:
    • Goods - The value of donated equipment or supplies may be recorded as the amount that the organization would have to pay for similar items.
    • Services - The value of services donated by volunteers pro bono that create or enhance non-financial assets owned by the organization (such as a building).  As a general rule of thumb, in-kind services must have these three qualities:
      • Something the organization would otherwise have to pay for
      • Something that requires a specialized skill
      • Something that is provided by someone with that special skill
  • You cannot recognize all volunteers hours on your audit, but you can ask your auditor to add a note with the total hours donated.

Expenses

  • Personnel usually highest expense.
  • The In-kind expense must mirror the in-kind contributed income.
    • In-kind does not affect the bottom line, but reflects the true cost of running an organization. Without recognizing in-kind as expenses, your financial reports could have an artificial surplus and not accurately reflect the organization's financial position.

Balance Sheet

The income statement summarizes what happened over a period of time. The balance sheet gives you a picture of an organization's financial condition for a single moment in time (for your audit, the last day of your fiscal year). The major sections of the Balance Sheet are assets, liabilities, and net assets.

  • Assets: What you own
  • Liabilities: What you owe
  • Net Assets: Accumulation of all surpluses and deficits over time (also called retained earnings, equity, or net worth)
Assets - Liabilities = Net Assets

Assets

  • Current Assets - Assets that could be converted to cash in the next 12 months:
    • Cash and Liquid Investments
    • Inventory
    • Accounts Receivable
    • Government Grants & Contracts Receivable
    • Foundation/Corporate Grants Receivable
    • Pledges Receivable
  • Long-Term Assets:
    • Long-Term Pledges Receivable (expected to be cash after more than 12 months)
    • Fixed Assets
      • Property & Equipment
      • Building Improvements
    • Accumulated Depreciation
  • Depending on the circumstances, pre-paid expenses can be either current or long-term assets:
    • Pre-Paid Expense (current): Paying an insurance premium that covers six months
    • Pre-Paid Expense (long-term): A security deposit for a multi-year lease

Liabilities & Net Assets

  • Current Liabilities - Due to be paid within 12 months:
    • Accounts Payable
    • Payroll, Vacation, Taxes Payable
    • Deferred Revenue - Money received prior to earning it
      • Example: season tickets for a theater
    • Notes (Loans) Payable
    • Current Portion of Long-Term Debt
  • Long-Term Liabilities- Due to be paid after more than 12 months:
    • Remaining Portion Long-Term Debt
  • Net Assets
    • Unrestricted Net Assets
    • Temp Restricted Net Assets
    • Permanently Restricted Net Assets

Depreciation

What is it?

Depreciation means you are recognizing the decrease in value of a fixed asset over its expected physical or economic life. It allows you to capitalize an asset by recognizing it as a fixed asset on your balance sheet, rather than recognizing its entire expense in the year of purchase.

  • Fixed asset: Something has relatively long useful life, usually several years or more, such as equipment, furniture, buildings and land. Also called Capital Assets.
  • Buildings, cars, equipment, computers and other technology all have a relatively long useful life, but decrease in value over time. Depreciation is a way to more accurately reflect the value of an asset. 
  • Funding depreciation is when an organization is able to achieve a surplus even while recognizing the depreciation expense of its fixed assets.
    • This can help you build a reserve to replace an item or pay for capital improvements.  

How To Capitalize An Asset

  • Do not recognize it as an expense at the time of purchase.  
  • Depreciate a portion of this value as an expense in each year of the item's life.

Depreciation Guidelines

  • IRS set of depreciation guidelines
    • Land does not depreciate.
  • Straight line depreciation: The cost of the asset is spread evenly over the useful life of an asset. 
    • Example: $10,000 van, loses $2,000 each year over 5 years.

Using the Financial Statements

Ratios

A useful balance sheet ratio is the current ratio - indicates whether or not you will have enough cash for expenses over next 12 months.

  • Divide Current Assets by Current Liabilities
  • Should be at least 1:1, higher is better

For more on ratios

Budgets

Remember, a budget is a planning document.  It is a guideline for how you expect things to be.

  • Compare actual numbers to budget:
    • Year to date (YTD) interim reports allows you to see how things are going, make changes as needed, and better prepare for next year's budget.
    • If there are significant changes, it might be good for your board to pass a new budget.

For more on budgeting, read the notes on Annual Budget Planning or explore our resources.

Cash Flow

If you are concerned about your cash position, the Cash Flow Projection can help you plan.  By recording when money comes in and goes out, it can help you:

  • Identify strong and weak months for your cash flow.
  • Find solutions (could you defer expenses until your grant comes in?)
  • Especially helpful when you are undergoing lots of changes.
    • Some organizations make it even more detailed with a weekly cash flow.
  • Formulas are built into the spreadsheet, so be careful not to override them by accident.

Challenges Around Public Funds

All funding streams have different requirements and expectations, and public funding in particular has a lot of strings attached:

  • Government contracts are usually based on reimbursements, which can create cash flow challenges.
  • Understand reporting requirements on the front end and ensure you are able to comply with them.
  • Government grants may require matching funds.
  • Rarely cover all overhead costs.
    • Organizations must find additional funding to cover the program.
      • Important to know what the full costs are and seek out adequate subsidy.
    • Nonprofits that only have government funds struggle to fully cover program costs.

"A dollar is not a dollar is not a dollar."

As a Board Member, What Should I Pay Attention To?

Interested in Learning More?

View our Resource Collection or check out the Discussion Archive for notes from other Financial Management Networks.

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