Joining the board of directors for a not-for-profit is an altruistic pursuit that can be very rewarding. However, it is critical for all board members of not-for-profits to recognise that even though not-for-profits are largely a labour of passion and civic duty, the legal and fiduciary duties imposed on those directors can be as onerous as when being appointed to a board of a commercial enterprise.
For directors of the not-for-profit, receiving complete and accurate information about the activities of the organisation is the first step in satisfying those legal and fiduciary duties. Directors are typically provided with a monthly Financial Report which they are required to read, understand and use to evaluate the financial position of the organisation. In order to fulfil these duties directors must ask for and be presented with accurate, timely and complete information.
Within this article I will explore the information that the board of a not-for-profit should insist be included within the monthly financial report, with questions and issues to consider.
Financial reports typically commence with a one page summary, providing a snapshot of the performance of the organisation and key financial indicators. The summary should provide an overview of the year to date performance against budget and the prior year, and include a full year forecast.
In order to ensure that the financial summary provides a complete picture for the board to consider, I suggest the financial summary include the organisation’s key reporting measures which typically consist of liquidity ratios, staff numbers, etc.
The remaining pages within the financial report flesh out the detail and tell the story behind the numbers.
The profit and loss statement
The profit and loss statement reports the revenue and expenses of the not-for-profit, with the overall surplus or deficit generated for the period. This statement outlines whether the organisation is profitable and should be presented parallel to the budget, enabling a comparison.
An important, and at times missed, inclusion with the profit and loss statement is the commentary explaining the story behind the numbers. The financial report should include an explanation for material variances between budgeted and actual revenue and expenses; with further commentary explaining the annual forecast. The narrative should help the board of the not-for-profit understand the results and strategically act in accordance with the results.
Key considerations for the profit and loss statement:
- Is revenue presented in accordance with Accounting Standards (to avoid material year-end adjustments)?
- Does the narrative explain any material differences between actual against budgeted results?
- What is the cause of any variance and the likely strategic impact to the organisation?
- Is the forecast of expenses and revenue commercially realistic?
- Does the budget and forecast support the achievement of the strategic plan?
- Does the budget align with the operational plan?
The balance sheet records the assets and liabilities of the not-for-profit with the difference representing equity (including retained equity). It is imperative that a fully reconciled balance sheet is included within the board financial information. This will enable the board to have an understanding of current and noncurrent liabilities, in particular liabilities that attract personal liability for directors, ie superannuation and Pay As You Go Tax to the ATO.
Key considerations for the balance sheet:
- Is the bank account fully reconciled?
- Are all remaining balance sheet accounts fully reconciled?
- Does the organisation have the appropriate cash and overall liquidity to support the ongoing business?
- Are liabilities classified correctly as current and non-current?
- Does the treatment of unearned revenue meet the requirements of Accounting Standards?
- Are there any known legal matters, contingent liabilities or regulatory reviews that may impact the financial position?
Cash analysis and cash flow forecast
The board of the not-for-profit should request year-to-date cash information with a monthly cash flow forecast. These reports enable the board of directors to evaluate that the organisation is able to pay its debts as and when they fall due; meeting their duty to prevent insolvent trading.
There could be a number of indicators that the not for profit is experiencing liquidity problems, which include cash expenses (including capital costs) consistently exceeding cash revenue, creating negative cashflows, superannuation and PAYG not being paid on time, trade creditors days increasing with a greater proportion of creditors within the 60 days + section of the accounts payable report.
Key considerations for the cash analysis and cash flow forecast:
- Can the organisation pay its debts as and when they fall due?
- Is cash operating revenue exceeding cash expenses ?
- What are the appropriate liquidity measures for the organisation?
- Is superannuation and PAYG paid in full and on time?
In addition to the above reports you may consider including a trade debtors reconciliation, a trade creditors reconciliation and an ongoing analysis of budgeted and actual program expenditure.
To ensure that the not-for-profit is sustainable and able to achieve its aims, the board needs to be able to satisfy its legal and fiduciary duties.
The ability of the board to do so starts with the information contained in the monthly financial report. A good financial culture will ultimately facilitate the ongoing enhancement of the not-for-profit organisation and reduce the financial risk profile of the organisation and of its directors.