Learning to Read Financial Statements

Monday July 12, 2021 comments Tags: nonprofit, accounting, financial statements, balance sheet, profit and loss statement

Hi, it's Chyla Graham. I am your host of The Nonprofit ACE Podcast. I run CNRG Accounting Advisory, and my goal is to help more nonprofit leaders feel comfortable talking about money. Thank you for joining us for this week's episode. Today, the question that's been burning in your hearts, when you think about the financials, what do you want to know? So people want to know three things about the financial statements. They want to know, cash on hand. And I'm saying this based off of conversations with nonprofit leaders, overhearing board conversations, there's really only three things that they want to know. 

So let's be clear about what those things are and where you can find them. So the number one thing that most nonprofit leaders want to know and most board members want to know is how much cash do we have? So where do you go to look for that that is going to be on your balance sheet or in the nonprofit world, we call that the statement of financial position. 

This is going to be the very first thing you see on that sheet is literally how much do we have in the bank? That's it. That is, if you're wondering where it is, it should be the first number, because it's the most liquid aka you can use it the soonest. So you're not waiting for it to cash out, you're not having to sell stocks, you're saying, I have cash right now in the bank, I want to use it. So that's the first thing you see on the balance sheet. 

The next things that people want to know is, how did money come in and how did money go out. So that is actually going to be on your p&l see your profit and loss. But in the nonprofit worlds, we call this the statement of activity. That's it, it's action activities. So it's money coming in money going out, it's not a stagnant thing. 

So at the very top of the statement of activity, aka your p&l or profit and loss statement, you're going to see how money came into the organization? Did you fundraise? Did you get a grant? Did you have donations, so all of that stuff is gonna be at the top, on the bottom half of your statement activity. Usually, it's more than half because I say there's probably five ways you can make money and 50 ways you can spend it. So the bottom 75 to 90% of your statement of activity is going to be how the money went out. And the order of that is going to vary depending on your organization and what it thinks is important, or how they order things. 

Depending on the software you use, it's just gonna say in alphabetical order, there are ways to force the order that it comes in, I like to think about it in a couple of buckets. So you should see a group of personnel related expenses. So what does it take in terms of manpower, or people power to get the work done, the next grouping of how you are going to spend money is, operations. So what can't we do without, so in addition to the people, you're probably gonna have some insurance, you're probably gonna have some software. So there are certain things that regardless of if you're virtual, or in person, if you are a remote organization, if you're just in the fields, these are just things that you have to have. 

And finally, the thing that might depend on the number of people served, is actually going to be your program expenses. So those are dependent for some organizations on how many people are we serving? Sure, there's gonna be a baseline of we're going to spend this much regardless. But it might go up or down, depending on how many people and so as leaders are looking at those reports, then thinking, hey, the number went up in terms of how much it costs. Does that mean we serve more people?

 

And so that's how you can use those statements to answer what people want to know. So if people want to know how much cash do we have on hand, you're gonna send them to the first page of your financial statements. That's usually the balance sheet, aka the statement of financial position, and it's going to be the very top line. So the very top is going to be this is how much cash we have, then people are going to want to know how did money come in and out of the organization. That's going to be your statement of activity. And the top part is going to be Hey, money came in via grant donations, fundraising events, whatever your organization does. And then money went out through these people we paid, these are the operating costs we can’t avoid. These are the program related expenses that show us how we did in serving our community. 

So I'd love to know what else you find that your board wants to know or you as a nonprofit leader wants to know when reading your financials. Alright, until next time, I'm Chyla Graham, you've been listening to The Nonprofit Ace Podcast.

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