Understanding the Financial Statement

As a volunteer leader on the board, you have a responsibility to be a fiduciary of the organization. That means you have been elected or appointed by trusted individuals and you represent the interests of all other individuals and organizations that have contributed time and resources to the organization. There are personal liabilities associated with this responsibility that should be taken seriously, as well. You need to train yourself to act in the same way you would act if you were taking care of your own financial and material assets.

Many nonprofit volunteer leaders find themselves encountering financial statements for the first time when they begin their board tenure. Some don’t even bother to look at the statements, since they have never been trained to interpret them and just see meaningless columns of numbers. Those numbers tell an important story about the health of the nonprofit organization and you have a responsibility to understand the numbers and the story in order to make wise decisions on behalf of others. Here are a few pointers for those who have very little experience with financial statements.

The statement should come in at least two parts. The Statement of Financial Position or Balance Sheet provides information about what you own versus what you owe. There will be differences depending on what kind of accounting method is used in your organization and what types of activities and programs you are engaged in, but a good way to think of this sheet is as a picture of the financial health of your organization at a given point in time. Next month the picture may be different. The statement will carry important items like bank balances and investment account balances and may also contain information about which bills you have received but haven’t paid yet, and amounts you have invoiced, but have not yet received payment

The second part of a basic financial statement is the Statement of Activities or Profit and Loss Statement or P&L. This is the part of the statement that will break down the sources of revenue you receive and how you spent that money to support various programs. Revenue (money you received) is at the top and Expenses (money you paid out) is below revenue. The current revenue and expense is only helpful if you can compare it to something else. There may be a target of total spending for the month or year that was set earlier and approved by the board (a budget) or a record of what the revenue and expense of the organization was at this time last year (a prior year comparison). Those may be columns next to the current month-end or year to date expenses so that you can compare them easily and see where you stand.

There may be some additional reports in your financial statement package. Cash flow statements provide information about net changes in cash in order to manage cash flow more effectively. Supplementary reports not directly tied to financials are also common. These often report numbers along with dollars (membership reports, exhibit booth sales reports, or grant-related reports regarding numbers of persons served or events held are examples of these reports). Your job as a member of the board is to study these reports and ask questions about things you don’t understand. Once you grasp these concepts you can faithfully execute your duties as a fiduciary of the organization.