by Jeff Curiel, CPA | Manager, Team Member of the Not for Profit Services Group
Financial statements regularly slide over your desk and pass through board members’ hands, providing a wealth of financial data on your nonprofit’s most recent month, quarter or year. But do you and the board rely on this valuable information to make business decisions and plan for the organization’s future?
Looking for insights
Think of the audited financial statements as a family album, providing a history of your nonprofit’s financial past. Examining that past can help you better manage your organization now and in the months and years ahead.
To glean meaningful insights from these documents, you need to understand what each statement represents. Take it a step further, and you (or the board members) can use the data to create a trend analysis, an industry comparison or a projection of upcoming challenges. Such tools can springboard your organization to making better-informed decisions.
Using financials to investigate
It’s critical that your nonprofit perform monthly comparisons of the organization’s financial results to its corresponding budget. Most financial software programs allow the budget to be entered by month and produce statements that compare actual results to what was budgeted.
Make it a policy to investigate any variances greater than a certain dollar amount or percentage. A smaller organization might, for instance, base the dollar amount on the amount used in its check-signing policy. A percentage of 5% to 10% variance is often used as the rule of thumb. This allows you to properly oversee and assess operations in a timely way, and evaluate the performance of individual programs and departments.
Using figures to forecast
Planning for the near future is critical in today’s lean economy. You can compare actual monthly results through the most recent month, and add future budgeted monthly amounts to prepare a forecast of the full-year results. This “best guess” of what will happen to the organization in financial terms over a given period of time may indicate the need to find more revenue and support and cut back spending. Or you may find just enough resources to buy those new computers. Basically, the comparison will indicate whether you’re on track with your original budget or if it should be revised.
Finding other uses
Financial information should be used to evaluate the organization’s effectiveness in meeting its mission. Monitoring program information from detailed financial records can help determine whether you’re accomplishing specific goals. You may also find it useful to share this information with donors to help them visualize how their donation would be used.
If your current year’s objective is to increase membership from 1,500 to 1,800, for example, examine the total membership fees collected and monitor the progress toward your goal. If $2 million are needed to build your new facility, use the monthly statement of activities to monitor pledges and develop a detailed listing of pledges receivable to monitor donor payments.
Using stats to improve
Comparing your annual results with other nonprofits in your industry — or benchmarking against industry statistics — can help identify your organization’s strengths or weaknesses. And this can lead to spotting growth opportunities or reallocating resources. Apply these same ratios over several years and you’ll have the basis for long-range strategic planning and better use of money and resources.
For example, you might notice that another nonprofit in the same industry spends significantly less on its facilities than you do while providing comparable services. Or perhaps it raises twice the dollars that your organization does each year. Use these revelations to target areas for improvement and to create discussion amongst your Board of Directors or other volunteer committees.