Understanding Your Organization's Financial Statements
Table of Contents
Many non-profit organizations rely on limited funds to reach their goals and run their programs. The management of these funds is the responsibility of its members, directors and executive. The good or bad management of an organization's finances will contribute to its success or failure.
There are two common accounting systems or methods for keeping track of an organization's financial situation: cash and accrual. Cash basis accounting recognizes transactions when the cash changes hands. Many small clubs or organizations with relatively few transactions each month use this system.
Accrual basis accounting recognizes income when it is earned and expenses when they are incurred. Under the accrual method, a bill that must be paid by the organization is included as a liability and money that the organization is owed is listed as an asset on financial statements. Accrual basis accounting gives a more accurate financial picture than cash basis accounting. This Factsheet describes financial statements typically used in an accrual system.
The financial situation of an organization is shown to its members through various types of statements. They include:
All financial statements indicate the type of statement, the organization's name, and the date or time period it covers.
A budget is a written plan that forecasts income (revenue) and expenses (disbursements) for a specified period of time (usually one year). Expressed in dollars, the budget is based on an organization's goals and ensures realistic planning of programs. Through its use, members can control and co-ordinate finances and programs.
Before approving the budget for your organization, check that the activities planned by your organization are receiving adequate funding and that all expenses are accounted for. As shown in Figure 1, a budget indicates predicted revenue, predicted expenses, and a predicted net income or loss (revenue less expenditures).
Figure 1. Morton Rural Community Organization Budget (January 1, 1999_ to December 31, 199_)
Note: If the net income is bracketed ( ), the organization anticipates a deficit or loss position for the time period reported. It is in the red!
What To Look For:
Event or Project Budgets are useful in planning specific projects or programs during the year. A project budget uses the same format as the budget and shows greater detail on a specific project or event.
This report, also known as a Statement of Operations or a Statement of Receipts and Disbursements, gives a picture of how much money was earned (revenue) by the organization and how much money was spent (expenses) over a specified period of time.
Figure 2. Morton Rural Community Organization Income Statement (January 1, 1999_ to December 31, 199_)
Note: Revenue and expenses budgeted for the year are compared to the actual revenue and expenses at year end. The variance indicates any difference between the amount budgeted and the amount actually received or spent. The difference may also be shown as a percent difference of the budgeted amount.
The income statement measures the actual progress of the organization as shown in Figure 2.
It is usually completed at the end of a fiscal year and is compared with past and future budget projections. It can also be prepared periodically through the year to check progress and make sure that all plans are on track.
The categories used for revenue and expenses are the same categories used in the organization's budget (see Figure 1).
What To Look For:
Organizations often prepare a financial statement to report on specific programs or events. Project reporting not only gives an accurate financial record of activities or events but is also helpful when planning future events.
Figure 3 shows an example including a comment section explaining details of the project.
Figure 3. Morton Rural Community Organization (Project) Report - November 22, 199_
A balance sheet is a summary of the financial position of an organization at a specific point in time (Figure 4).
As shown in Figure 4, a balance sheet has three parts.
Anything of value that the organization owns. Your organization may have one or several of each of two types of assets listed in its balance sheet.
Current Assets are money or items of value which can be readily converted into cash. Examples include securities, inventories (items for sale and supplies to be used), prepaid expenses, and services.
Fixed Assets are property or equipment that is expected to last longer than one year.
Fixed assets may be reported by original cost, market value (amount asset could be sold for) or by depreciated value. Depreciation spreads the cost of an asset over its useful life. The annual cost of depreciation (determined by published schedules) will be shown on the income statement (Figure 2). The remaining asset value is carried forward and reported on the balance sheet.
The value of the office equipment in Figure 4 has been depreciated. Land is not depreciated since it is not consumed over time and seldom declines in value. Notes relating to the valuation of fixed assets are usually included in the balance sheet or are attached as an appendix.
Debts or amounts owed by the organization. This includes money owed to suppliers for services and amounts owed to employees for wages or salaries.
Current liabilities are obligations due and payable within one year (including any loan principle payments).
Long term liabilities are obligations such as loans or a mortgage to be paid off in more than one year.
3. Equity, Net Worth or Capital
Equity = Assets - Liabilities
Reviewing the association's equity is important because it shows the accumulated worth of an organization. In Figure 4:
Equity = $15,800 - $2,350
Relationship between the Income Statement and the Balance Sheet
The net income (or loss) from the Income Statement in Figure 2 = $300) is brought forward to the Balance Sheet (Figure 4 - equity). To obtain the year end equity position, net income is added or net loss is subtracted from the equity position at the beginning of the year.
Figure 4. Morton Rural Community Organization Balance Sheet (December 31, 199_)
Note: A balance sheet must always be in balance!
Total Assets = Total Liabilities + Equity
$15,800 = $ 2,350 + $13,450
What To Look For:
Financial ratios can be used to evaluate the financial stability of an organization. Information from the balance sheet is essential to calculate financial ratios. Table 1 shows two types of ratios and how they are calculated.
Liquidity refers to the ability of the organization to meet cash obligations as they come due in the short term (less than 12 months) and is usually measured by the current ratio.
A current ratio of .34 indicates there are 34 cents worth of current assets to back up each dollar of current liabilities. A current ratio of less than 1 means that there are insufficient current assets to cover short term debt. This could cause cash flow problems. An organization that has its current ratio greater than one would be able to pay its immediate bills from currents assets.
Debt financing refers to the ability of an organization to cover debts. The lower the ratio, the less risk of financial difficulties for the organization and less risk to creditors.
In this example the Percent debt to assets ratio shows that only 15% of assets are encumbered by debt. This is a strong financial position. An organization with a debt to assets ratio of over 100% would be in a very weak position.
Members learn about the financial health of their organization by reading the financial statements. It is your responsibility as a director or member to understand the financial statements of your organization. You will then be able to determine the financial status of your organization and make sound financial decisions to ensure that it remains healthy.
Financial Management - Skills Program for Management Volunteers. Kent, Judy and Dorothy Strachan. Skills Program, 1985.
Financial Management for Community Groups - The Voluntary Action Resource Centre. Grange, Alix and Margaret Vrabel. 1984.
Ontario Ministry of Agriculture and Food - Money Matters: A Guide to Farm Financial Planning. Publication 379. 1990.
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