September 23, 2017
 
Financial Statements Help Nonprofits Stay on Track

By Rebeka Mazzone, CPA

Rebeka Mazzone
Because senior managers at nonprofits frequently wear multiple hats, many tend to rely primarily on their income statement to navigate the medium term — but they do so at some risk to their organization.

"Senior managers should look at all three financial statements — the balance sheet, income statement, and cash flow projections — and focus on where their organization will be at the end of the year, rather than just where they are now," advises Rebeka Mazzone, a senior consultant with Accounting Management Solutions, Inc.

Compounding the problem of those who primarily use the income statement is a tendency to look at a consolidated income statement.

"Management needs to know if each program or department is covering its costs. If not, it means the program may not be fulfilling its mission. It could also mean there isn't enough demand for the program or that you can't deliver services at a reasonable cost."

If nonprofits want to subsidize a particular program because it is important to the mission, they should do so explicitly, not implicitly, Mazzone advises. Otherwise the entire organization could fail. A close reading of the income statement will help them monitor such situations.

Use Financial Statements to Look Ahead

Most critically, senior managers should use financial statements to assess where they will be at the end of the year. However, many do not.

"This is fully understandable because financial statements reflect an earlier point in time, be it last quarter or last month," says Mazzone. "The question for all senior managers is, where will we be next month, next quarter, and at the end of the year?"

Accounting for mortgage payments illustrates the interplay of the income statement, balance sheet and cash flow projection.

As a mortgage is paid off, monthly payments remain the same while interest payments decline and principal payments increase. Over time, the income statement will look better because interest costs decline. However, the balance sheet is becoming less liquid since working capital is reduced as cash on hand (a current asset) to pay the mortgage and the mortgage itself (a liability) diminish. Looking at all three statements together yields a fuller picture of where financials are headed.

Also, buying a capital asset or putting money into capital reserves increases assets but reduces cash flow, which could mean less cash to pay near-term obligations.

All of these situations make managing cash flows more complex, and it becomes more tricky when managing reimbursable grants. Programs funded by grants typically incur expenses one month, submit a reimbursement request the next month, and often have to wait two or sometimes more months to get the money. Your income statement will reflect the revenue and expenses, but your cash is reduced until you are reimbursed.

"When it comes to managing grants, requisition the money as soon as possible and plan for it as early as possible, especially if you have little in the way of unrestricted operating net assets," says Mazzone.

Most not-for-profits do not have lots of excess unrestricted cash, so projecting how much cash you will have at the end of each of the next 12 months is important.

Boards Need to Focus on the Right Information

Finally, boards provide financial oversight best by focusing on the organization's overall financial performance, says Mazzone, which means focusing on the right information. They need to be able to understand the financial situation of the organization in a few short hours each month. This is to accomplish, which makes it even more imperative that the board gets the right information in the right format to understand this in the least amount of time.

"The board needs to ensure that the organization is on target to meet budget by year end, understand whether each program is profitable, ensure that there is not a balance sheet deficit and make sure that the organization will have enough cash each month to meet its obligations," she says.

"Having the board approve small contracts or staff salaries is asking it to focus on the wrong financial information. The board keeps the organization on track by looking at the larger picture."

Rebeka Mazzone, senior consultant at Accounting Management Solutions, Inc., works with nonprofits on a full range of accounting and financial management issues. Call her at 401-374-3222 or email to rmazzone@amsolutions.net.

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