Making Sense of Your Financial Reports

Tuesday August 23, 2022 comments Tags: nonprofit, accounting, balance sheet

Any accounting business and tax advice contained in this podcast is not intended as a thorough in depth analysis of specific issues. Nor is it a substitute for format information. Nor is it sufficient to avoid tax related penalties. If you have specific questions that you need advice for, be sure to schedule a strategy session and not solely rely on information in this podcast.

Hey, it is Chyla Graham and we are looking to help the overwhelmed nonprofit leader feel less anxiety about money so they can talk about their impact and go ahead and make that impact.

So, back before I worked, before I started CNRG Accounting Advisory, I worked as an auditor, many moons ago. And we had a client who straight up lied to their board about the financials. So what happened was, they were not updating their financials, they were just like, "Yo, I know people paid us money. I think these numbers look good." And the board was just taking it.

They were just like, "Oh, okay." And this is a problem, because this is why you're probably nervous about money, because you're just like, "Are the people that I hire going to do the thing?" So let me tell you what you should be doing to check if the financial statements that you're getting are actually telling a story that makes sense.

So number one, the first part of any financial statement is going to be the balance sheet. This is where they say, as of this day, you have X dollars in the bank, or this much is owed to you, or you owe people this much money. When you look at that page, two things should happen. Your assets, so that's going to be everything you own, is equal to your liabilities, AKA what you owe other people, plus your equity, what your organization is worth. Think about it in terms of your value.

So those are two things. Math equation, assets equals liabilities, plus equity, or net assets for a nonprofit. If those two balance, cool, you're in a good place. Another thing you want to think about on that balance sheet is, if our cash is high, are our liabilities high? Because that could mean that hey, we have more cash than normal, or more cash than expected, because we're not paying our bills. A great follow-up question to that would be, why are we not paying our bills?

Then the other thing I would want to highlight on your balance sheet is your receivables. So those receivables are, we are expecting money from people. This could be because you provided a service, because people said they would donate to you, or because you are waiting for a grant, like you got the award letter, but you're waiting for the actual cash to come in.

So if your grant balances are high, and your cash is low, that would make sense, because people owe you money, and so you don't have the physical cash, or your bank doesn't have the physical cash. Alternatively, if your receivables are high, and your cash is high, I would wonder is revenue really high compared to what we would think. So those are the things I would look out for on your balance sheet to see if that story makes sense.

The second item on your financials is going to be the statement of activity, or profit and loss statement, for those of you who are more used to a different form of naming. And that is where they're just saying, hey, this is how you got money, and this is how you spent money. This is going to say, hey, people donated, you sold, you fundraised. All of those things are going to be on this sheet. Things to look out for on this sheet is more trends. So this sheet is really good, only if you're looking at it compared to something.

So be it compared to the budget, compared to the prior year, compared to the prior month. Without context, the story won't make sense. So when you're just looking at, okay, this month we made $300,000, or this month we lost $30,000. All of that is relative, and it doesn't mean anything, unless you have something to line it up against, so when you're lining it up to the budget, you're saying, "Oh, this month we expected this to happen, but this happened instead." So now you can think about, hey, I have a question. Why didn't we hit this fundraising goal? Or, hey, why is payroll expense so high? Again, seeing it in comparison to something, especially in comparison to your budget will give you a better idea. Does this story make sense?

The other comparison you can have is compared to the prior year. So same month, different year, you can see, hey, what's different in the way we do things from one year to the next? Or when you compare it to the prior month, what's different from this month, compared to that month? And you can begin to see trends for your organization.

Those are the two things that I recommend you think about and seeif the story that they're telling actually makes any sense at all. So your tip, your to-do, your action item, is to go to your last financial statement. Look to see, "Hey, does my balance sheet actually make sense?" If my liabilities are high, is my cash low? Are we holding on to cash for some reason? What questions does that generate. Also you should go over to your income statement and say, "Hey, I don't want to think about this in a silo, but compared to another thing, compared to our budget, or compared to another period, another month, another year, how does it look?" And that'll help you generate some questions.

If you're still not sure what to ask, head over to our website. The link will be in the transcript, and you can get the download of questions to ask for your financials. That way you have a better idea of like, hey, what should I be asking my accounting team? What would help trigger some questions or concerns? Hope this is helpful. Excited to hear your feedback about this tip, please let us know what you learned, what came to light, what you're like, "Oh, crap" about. Tag us at @cnrgadvisory on social media: that's Twitter, Instagram, and Facebook.

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