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
This is just a sample of items in a general format. Feel free to customize to your organization
Please contact us with questions regarding development of your NPO finance committee’s agenda and visit our Our Thoughts On blog for more articles pertaining to the not-for-profit industry.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.