Financial Reports to the Board
The most central duty of Board is to oversee the financial health of the organisation. The most common form of oversight is financial reporting, where the Treasurer or Finance Offer presents financial reports to the board, comparing performance against the Budget.However, not all board or management committee members will have backgrounds in book-keeping or accounting. Nevertheless, all members need to be able to understand and interpret the financial documents presented to them at board or committee meetings. While it is tempting to defer to the expertise of other board members on financial statements, you could be making yourself legally liable by doing this.
In a non-government or voluntary organisation, four concepts will generally be used in financial reports: assets, liabilities, expenses and revenue/income:
- Assets are what the organisation "owns" or income due to it e.g. cash, equipment, accounts receivable, inventory.
- Liabilities are what the organisation "owes", e.g. bank overdraft, creditors, loans, staff leave not yet taken.
- Expenses are the "costs" incurred by running your organisation, e.g. wages, rent and telephones.
- Revenue or Income is what you "earn"; in the case of a non-government organisation this will commonly be grants, user fees, donations and membership subscriptions.
A Profit and Loss Statement is a statement which shows the revenue and expenses of the organisation over a certain period of time. By subtracting the expenses from the revenue you get the 'net surplus' or 'net deficit' at the bottom of the statement. Sometimes organisations carry a "net deficit" over a period of time (for example, when waiting for a large grant to come in), but be sure to raise the issue at Board meetings if the organisation is running any risks associated with this.
A Balance Sheet is a listing of all the assets and liabilities at a certain point of time. The basic rule is that the total assets should equal the total liabilities. (In a private firm you would also include the owner's equity in the equation, but this does not really apply in a non-profit situation.) A basic approach to the balance sheet is to be sure that, if you wound up business tomorrow, you wouldn't be left with any outstanding debts you couldn't pay. In this way a balance sheet is a good financial 'health check'.
Understanding the above terms and concepts will get you across the first hurdle of reading financial statements. Remember, however, that financial reports can be often a lot more complicated than this because every organisation has a different 'financial cycle'.
A common problem in NGOs is that 'income' doesn't work like a private business, which 'sells' its products and banks the proceeds. Often, there are big and small grants and they are paid at different times of the year. Or you are constantly putting in grant applications and no-one knows which ones will be successful.
As a board member you can ask the Treasurer to incorporate a 'risk' assessment of the financial statement to provide an indication of the grant situation, e.g. 'likely to receive','have been short listed', and so on.
It can also be helpful to the whole board to view a 'user friendly' version of the accounts. This could include a one or two-page summary on the front of the statement, highlighting the most important information for the board. The Treasurer's report to the board could then involve a run-down and questions on this summary.
If you feel intimidated by the financial statements, or want to build up your skill-base in this area anyway, many community colleges run one or two day workshops on accounting basics. You will probably find the whole class made up of small business people and people involved in voluntary or non-government organisations. Also, if you have a Treasurer who communicates well you could ask them for a couple of lessons on the finances.
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