I hope the Finance Committee’s first order of business is the financial statement review. As a CPA in a public accounting firm, the primary preparation of financial statements is in accordance with generally accepted accounting principles (GAAP) and the related footnote disclosures, focusing on the reader or user of the financial statements. However, the preparation of internal financial statements requires a much different focus.
Internal financial statements prepared for management and finance committees take on a whole new meaning. Yes, there is a still review of assets and liabilities. However, the attention on assets is in their performance and ultimately conversion into cash. Regarding liabilities, finance committees are more concerned with liquidity and maintaining working capital.
Now, this is where the divergences occurs. GAAP financial statements look at revenues and expenses grouped together. Internal financial statements look at individual cost/profit centers. The focus is more on a program-by-program basis, paying particular attention to the monthly performance. In addition, budget-to-actual variances are reviewed monthly and year-to-date. Indirect costs are reviewed to ensure proper allocation is occurring. Another area of focus is the receipt and spending of restricted funds in accordance with the donors’ wishes.
Beyond the basics, best-in-class reporting also includes productivity analysis. Social service organizations look at the number of encounters, chargeability ratios, census date, etc. Performing arts organizations look at the attendance and production costs as a percentage of revenues.
Here is my recommended agenda of items for you to focus on in your next internal finance meeting:
- Statement of financial position
- Cash discussion of account reconciliations and management
- Investment transactions and balances
- Accounts and pledge receivables aging report
- Any capital asset acquisitions or disposals
- Accounts payable aging report
- Accrual discussions and expectations
- Payroll – monthly accrual and payroll tax payments
- Debt – borrowing capacity and payments
- Detail listing of temporary and permanent restricted net assets
- Profit and loss by program
- Headcount trend analysis
- Indirect cost allocation schedule
- Detail review of management expenses
- Productivity trend measurement ratios
- Budget to actual variances explanations
- Contributions – annual and long-term pledges
- Litigation matter
- New busines
- Old business
This is just a sample of items in a general format. Feel free to customize to your organization