There are two essential financial statements:
Balance Sheet
This shows the current financial status of the organization since its inception. It lists all the bank balances, the designated and restricted funds (a heavily used and very good tool for non-profits), reserve accounts, debts and equity (the summary of all years’ receipts over expenses).
Income Statement (aka, Profit & Loss Statement, Statement of Revenues & Expenses, Statement of Receipts & Expenses)
This shows how well the organization is doing in the current fiscal year. It doesn’t take into consideration previous years (that is on the balance sheet). It should have annual budget to track actual expenses against what was forecasted.
- Other financial statements are the designated funds summary (a very useful tool to track receipts and expenses in designated, restricted, and reserve funds) and statement of cash flows (to show how balance sheet money has been used).
- Notes in financial statements are an excellent way to answer questions before they are asked. The rule of thumb is that if there is an extraordinary expense or receipt, it should be explained in the notes. Notes can also be used to explain variances from month-to-month and to give a heads-up about an upcoming expense or receipt.
But what is their purpose? How should this financial info be used?
Financial statements are not scorecards. Some organizations measure all progress in financial terms. This is a mistake. It’s like measuring a child’s progress strictly by his grades or her height. There are many, many nuances to finances that cannot be put in numbers. Financial statements are not THE measurement, they are A measurement.
Financial statements are not insignificant. Just as financial statements are not the absolute yardstick, they should not be ignored, either. There is a reason for every number on a statement. Some numbers are more important than others and it is up to the staff and finance committee members to decipher which figures should be analyzed further. Financial info should never be discarded.
Financial statements should lead to questions. Financial statements should never be taken at face value. They are a reason to ask questions, especially hard questions. All questions are good – some are purely explanatory, some may lead to defensiveness by the staff (and those ought to be explored further), and some may lead to more questions to get to the root of an issue. The oversight committee must never be afraid to ask good, tough questions and not be satisfied with easy and quick answers. This is the committee’s responsibility, to do less is negligent.
Financial statements are a decision-making tool. This is the ultimate purpose of financial statements: to aid in making critical decisions for the organization. Financial figures are one part, albeit very important, in making sound strategic and tactical decisions for every organization. This means the numbers and the reason for the important numbers must be fully understood and explainable. Then, use that knowledge to provide financial insight to critical decisions. An important decision that does not have financial input is not a fully thought-out decision. Make sure financial info is included in the process for making vital decisions but that finances are not the sole rationale for any decision.
Lead On!
Steve