Understand what your income statement and balance sheet are really telling you

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You can’t solve a problem without knowing it exists and from where it originates. Organizations that take the time to analyze both their true operating performance in a given year and their overall resilience as reflected in the balance sheet have the clearest understanding of their financial condition and are therefore best positioned to make smart decisions accordingly. I worked with one human services organization that seemed to be fairly financially stable, judging by their annual profitability—in most years, revenue kept up with expenses. But the balance sheet told a very different story. They had outstanding loans accrued from the last ten years that they had no ability to repay with existing or prospective money. Additionally, the balance sheet reflected ownership of an extensive amount of property, all of which was fully depreciated and in need of immediate maintenance. This understanding of the balance sheet was critical for the organization’s fundraising and decision making—an examination of the income statement alone would have masked the nature and immediacy of its true needs and the fact that it had no cash or receivables to absorb deficits. When looking at their income statements, smart leaders are making sure that they separate restricted from unrestricted funding—something that is not always made clear externally in audits or other nonprofit accounting treatments. These organizations then know whether they are running an operating surplus or deficit. “Counting” restricted funding (such as foundation grants for future years) in the year it was awarded rather than in the year it can be spent can skew the view of an organization’s current financial situation. In addition to looking only at the amount that’s spendable in a given year, it’s also important to separate operating from non-operating money, such as from a capital campaign or endowment gift. Looking at finances like this year after year will help an organization understand its true ability to meet operating expenses.
While surplus and deficit are an important measure of one year’s performance, the balance sheet reflects an organization’s overall financial resilience. It shows all of an organization’s resources (assets), how much is owed to others in payables and debt (liabilities), and how much cash is accessible to cover expenses. By examining the ratio of assets to liabilities and the funder restrictions placed on them, non-profit leaders can begin to understand how much financial breathing room an organization has for operations.

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Be willing to make data-driven decisions
Beyond having access to the right data (be it financial, programmatic, or management), management needs to understand the implications of the data and be willing to make difficult choices based on the information. The organizations we’ve seen most often on the right track were the ones with access to accurate, timely, and actionable management data, an understanding of what the data were saying, and a willingness to take decisive action based on the data. Management and planning tools most often used by organizations that were able to be nimble in their decision making included profit/loss statements, balance sheet reports, cash-flow projections, profitability analyses, and dashboards. But more important than the volume of data, effective leaders knew how to zero in on the key programmatic and financial metrics that should be used to drive their decisions. To be truly helpful, the data must be presented well, in clear and regular reports. Often, the ability to make “real-time” decisions from these management reports and analyses was the key to turning a deficit situation into a break-even or surplus year.
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Anonymous
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Joined: 2012-08-20
Understand your cash situation
Every non-profit, whether in a cash crisis or not, should understand its cash-flow situation. Reviewing cash-flow projections regularly will help you predict your organization’s need for cash throughout the course of the year and allow you to plan for potential shortfall. By seeing a visual landscape of cash coming into and leaving the organization, managers can begin to distinguish between seasonal lags in cash versus what might be a lack of cash (liquidity) in general, each of which requires very different interventions. Cash-timing strategies might include extending payables (provided that you are staying within your vendor’s credit terms), accelerating the collection of receivables, or accessing an outside line of credit. On the other hand, overall cash shortages will require broader management tactics that result in increased revenue or reduced expenses. Finally, keep in mind that if the cash received is restricted for future periods, it should be tracked separately to ensure appropriate usage; otherwise, your organization may end up using dedicated funds in a way not intended by the donor.

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