Is it just us, or does the nonprofit board room get veeery quiet when the treasurer begins their report?
And the silence that follows, when they ask if anyone has any questions – does it feel heavy… with questions?
If so, it’s safe to say there’s at least a few people sitting around the table who don’t understand your nonprofit’s financial statements. And if they don’t understand the statements, they can’t possibly fulfill their fiduciary responsibilities to the organization and its donors.
We’re not going to dumb it down for anyone – fiduciary responsibilities are a big deal. Keep reading to learn more about them and how you can fulfill yours by understanding a few important nonprofit financial statements.
We asked our friend Lee Wunschel, an accountant with extensive experience working with nonprofit organizations, for his key recommendations for board members. Here’s what he had to say:
Nonprofit accounting is different than for-profit accounting. And this leads to notable differences in terminology and documentation.
For example, revenue can be received as cash or a pledge… and because donors can restrict their gifts for certain uses, that revenue may not be available to fund operations or the most urgent needs of the mission.
Additionally, it helps to understand key financial documents shared in the nonprofit board room.
- Statement of financial position – In the for-profit world, this is known as a balance sheet. It’s intended to provide a snapshot of an organization’s financial health through a measure of its assets, liabilities and net assets.
- Statement of activities – This is the nonprofit sector’s version of a profit and loss (P&L) statement. Its purpose is to – you guessed it – summarize the financial activities of an organization over a specific period of time (often quarterly). These activities include revenue, expenses and changes in assets and they contribute to the overall health of your organization.
- Statement of functional expenses – This report is important because it provides a breakdown of dollars spent in three key catagories: programming, administration and fundraising. This level of detail and the scrutiny that comes with it are unique to the nonprofit sector. And while the percentage of spending on admin versus programs is one of several data points that can be used to assess the effectiveness of a mission, it is often over emphasized to the point of valuing efficiency over impact and innovation.
Nonprofit board members have a fiduciary responsibility to their organizations.
This means they are obligated under law to pay attention, be good stewards and act in the best interests of the organization. In Ohio, these responsibilities are outlined by the secretary of state’s office: Guide for Charity Board Members. Visit your state’s website for more information.
If you don’t understand, ask!
It’s a win-win for everyone, especially your mission.