Make $ Make Reading and Understanding Financial Statements

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1 Make Make Reading and Understanding Financial Statements Goals for the Day Introduce three common financial statements statement Balance sheet ash flow statement How to analyze the statements Uses of the statements Statement Based on activity during a specified time period an compare trends and budget versus actual amounts = hange in Net Assets (or Net ) A Youth ounseling enter Actual ompared to Budget Statement For the Twelve Months Ending December 31, 20XX Actual Without Restriction Budget Variance Individual 1 ontributions 14,230 18,900 (4,670) (4,000) 2 orporate/foundation Grants 40,000 44,000 3 Government Grants 10,000 10,000 4 In Kind ontributions 6,900 6,900 5 United Way 21,000 21,000 6 Total 92, ,800 (8,670) Revenue 7 lient Fees 7,850 7, ontract 5,500 5, Interest (30) 10 Miscellaneous (25) 11 Total Revenue 13,515 12,420 1, Total and Revenue 105, ,220 (7,575) 13 Personnel 72,750 72, ontract and Professional Fees 2,500 2, In Kind Professional Fees 6,900 6, Advertising and Promotions 2,543 3,900 (1,357) 17 Office 5,982 6,410 (428) 18 IT 2,065 1, Occupancy 4,500 4, Travel 1,175 1,500 (325) 21 Meeting 2,003 3,160 (1,157) 22 Insurance 1,850 2,400 (550) 23 Interest (192) 24 Depreciation 1,000 1, Other 822 1,440 (618) 26 Total 104, ,575 (4,302) 27 Surplus/(Deficit) 1,372 4,645 (3,273) 1

2 Grants Donations Other ontributions Revenue ontracts Fees for services or program revenue Sales In kind ontributions of goods or services rather than cash A Youth ounseling enter Actual ompared to Budget Statement For the Twelve Months Ending December 31, 20XX Actual Without Restriction Budget Variance Individual 1 ontributions 14,230 18,900 (4,670) (4,000) 2 orporate/foundation Grants 40,000 44,000 3 Government Grants 10,000 10,000 4 In Kind ontributions 6,900 6,900 5 United Way 21,000 21,000 6 Total 92, ,800 (8,670) Revenue 7 lient Fees 7,850 7, ontract 5,500 5, Interest (30) 10 Miscellaneous (25) 11 Total Revenue 13,515 12,420 1, Total and Revenue 105, ,220 (7,575) 13 Personnel 72,750 72, ontract and Professional Fees 2,500 2, In Kind Professional Fees 6,900 6, Advertising and Promotions 2,543 3,900 (1,357) 17 Office 5,982 6,410 (428) 18 IT 2,065 1, Occupancy 4,500 4, Travel 1,175 1,500 (325) 21 Meeting 2,003 3,160 (1,157) 22 Insurance 1,850 2,400 (550) 23 Interest (192) 24 Depreciation 1,000 1, Other 822 1,440 (618) 26 Total 104, ,575 (4,302) 27 Surplus/(Deficit) 1,372 4,645 (3,273) In Kind Know the rules around what can be included as in kind and what cannot There are differences between how donors may treat in kind contributions and how nonprofits may treat them Special requirements for contributions valued over 5,000 When booking in kind, the revenue always matches the expense Be sure to consult IRS contribution publications and your auditors for more information Personnel Salaries and wages for staff Includes other employee pay related expenses: Payroll taxes Health, dental and other insurances Other benefit expenses Usually the largest expense for nonprofit organizations Occupancy Rent Utilities Frequently the second largest expense for nonprofits A Youth ounseling enter Actual ompared to Budget Statement For the Twelve Months Ending December 31, 20XX Actual Without Restriction Budget Variance Individual 1 ontributions 14,230 18,900 (4,670) (4,000) 2 orporate/foundation Grants 40,000 44,000 3 Government Grants 10,000 10,000 4 In Kind ontributions 6,900 6,900 5 United Way 21,000 21,000 6 Total 92, ,800 (8,670) Revenue 7 lient Fees 7,850 7, ontract 5,500 5, Interest (30) 10 Miscellaneous (25) 11 Total Revenue 13,515 12,420 1, Total and Revenue 105, ,220 (7,575) 13 Personnel 72,750 72, ontract and Professional Fees 2,500 2, In Kind Professional Fees 6,900 6, Advertising and Promotions 2,543 3,900 (1,357) 17 Office 5,982 6,410 (428) 18 IT 2,065 1, Occupancy 4,500 4, Travel 1,175 1,500 (325) 21 Meeting 2,003 3,160 (1,157) 22 Insurance 1,850 2,400 (550) 23 Interest (192) 24 Depreciation 1,000 1, Other 822 1,440 (618) 26 Total 104, ,575 (4,302) 27 Surplus/(Deficit) 1,372 4,645 (3,273) 2

3 (ont.) Program related expenses Interest expense Interest portion of loan payments are recorded as an expense Depreciation Property and equipment are depreciated Non cash expense to recognize the value of using a fixed asset (ex. building, vehicle, computer) each period Taxes Sales taxes Unrelated business income tax A Youth ounseling enter Actual ompared to Budget Statement For the Twelve Months Ending December 31, 20XX Actual Without Restriction Budget Variance Individual 1 ontributions 14,230 18,900 (4,670) (4,000) 2 orporate/foundation Grants 40,000 44,000 3 Government Grants 10,000 10,000 4 In Kind ontributions 6,900 6,900 5 United Way 21,000 21,000 6 Total 92, ,800 (8,670) Revenue 7 lient Fees 7,850 7, ontract 5,500 5, Interest (30) 10 Miscellaneous (25) 11 Total Revenue 13,515 12,420 1, Total and Revenue 105, ,220 (7,575) 13 Personnel 72,750 72, ontract and Professional Fees 2,500 2, In Kind Professional Fees 6,900 6, Advertising and Promotions 2,543 3,900 (1,357) 17 Office 5,982 6,410 (428) 18 IT 2,065 1, Occupancy 4,500 4, Travel 1,175 1,500 (325) 21 Meeting 2,003 3,160 (1,157) 22 Insurance 1,850 2,400 (550) 23 Interest (192) 24 Depreciation 1,000 1, Other 822 1,440 (618) 26 Total 104, ,575 (4,302) 27 Surplus/(Deficit) 1,372 4,645 (3,273) hange in Net Assets Total of all income minus total of all expenses equals hange in Net Assets Other names: Profit/(Loss) /(Loss) Surplus/(Deficit) Net income for the period of the statement an be a surplus or a deficit In this example the Surplus is 1,372. REMEMBER THIS NUMBER! A Youth ounseling enter Actual ompared to Budget Statement For the Twelve Months Ending December 31, 20XX Actual Without Restriction Budget Variance Individual 1 ontributions 14,230 18,900 (4,670) (4,000) 2 orporate/foundation Grants 40,000 44,000 3 Government Grants 10,000 10,000 4 In Kind ontributions 6,900 6,900 5 United Way 21,000 21,000 6 Total 92, ,800 (8,670) Revenue 7 lient Fees 7,850 7, ontract 5,500 5, Interest (30) 10 Miscellaneous (25) 11 Total Revenue 13,515 12,420 1, Total and Revenue 105, ,220 (7,575) 13 Personnel 72,750 72, ontract and Professional Fees 2,500 2, In Kind Professional Fees 6,900 6, Advertising and Promotions 2,543 3,900 (1,357) 17 Office 5,982 6,410 (428) 18 IT 2,065 1, Occupancy 4,500 4, Travel 1,175 1,500 (325) 21 Meeting 2,003 3,160 (1,157) 22 Insurance 1,850 2,400 (550) 23 Interest (192) 24 Depreciation 1,000 1, Other 822 1,440 (618) 26 Total 104, ,575 (4,302) 27 Surplus/(Deficit) 1,372 4,645 (3,273) ontributions & Restrictions ontributions can have restrictions placed on the funds Restrictions can be either time based or use based Restrictions are only placed by the contributor/donor Designation of funds can be placed by the board on unrestricted funds 3

4 Types of Restrictions Without Restriction Unrestricted ontribution is available for general use TEMPORARILY RESTRITED Restrictions based on time or specific use Often program specific grant With Donor Restriction Permanently Restricted Original contribution amount must stay in tact Interest and earnings on the original contribution can be used Often in the form of an endowment Restrictions in When received with donor restriction column When restriction is met subtract from With Restriction column and add to Without Restriction column (line 6) B Without With Restriction Restriction Total 1 Individual ontributions 14,230 14,230 65,000 2 orporate/foundation Grants 25,000 40,000 3 Government Grants 10,000 10,000 4 In Kind ontributions 6,900 6,900 5 United Way 21,000 21,000 6 Net Assets Released from Restriction 15,000 (15,000) 7 Total 92,130 25, ,130 Restrictions in Surplus/Deficit Surplus or Deficit is displayed for both With and Without Restriction olumns Surplus/(Deficit) in Without Restriction column = operating income or loss Surplus in With Restriction column = funds available for future years Deficit in With Restriction column = funds awarded in prior periods that were released in the current period B 28 Surplus/(Deficit) 1,372 25,000 26,372 4

5 Balance Sheet Shows your net worth Snapshot in time balances are displayed as of a certain date Reserves can be found here The future can be seen here Assets = Liabilities + Net Assets Assets Items owned by the nonprofit Provide economic benefit to the nonprofit The nonprofit has the right to access the item Must be able to be displayed in dollar value Assets (cont.) urrent assets are resources that are cash or will be converted to cash in the next 12 months Long term assets are resources that will be converted to cash after 12 months Youth ounseling enter Balance Sheet December 31, 20XX Without Restriction Assets urrent Assets 1 ash and Investments 9,558 2 Accounts Receivable Grants Receivable 5,000 4 Govn't Grants & ontracts Receivable Pledges Receivable 1,200 6 Prepaid Total urrent Assets 17,583 8 Long Term Assets Long Term Pledges Receivable 1,000 9 Building Improvements (5 yr lease) 8, Equipment & Furniture 14, Accumulated Depreciation (12,500) 12 Total Long Term Assets 10, Total Assets 28,083 5

6 Assets (cont.) Two types of receivables: Dollars owed to the organization for goods or services provided to others Grants, pledges, or government contract dollars owed to the organization Youth ounseling enter Balance Sheet December 31, 20XX Without Restriction Assets urrent Assets 1 ash and Investments 9,558 2 Accounts Receivable Grants Receivable 5,000 4 Govn't Grants & ontracts Receivable Pledges Receivable 1,200 6 Prepaid Total urrent Assets 17,583 8 Long Term Assets Long Term Pledges Receivable 1,000 9 Building Improvements (5 yr lease) 8, Equipment & Furniture 14, Accumulated Depreciation (12,500) 12 Total Long Term Assets 10, Total Assets 28,083 Assets (cont.) Fixed Assets Equipment, furniture, fixtures, buildings Have estimated useful lives of multiple years Purchases are capitalized as fixed assets on the balance sheet and depreciated over time Youth ounseling enter Balance Sheet December 31, 20XX Without Restriction Assets urrent Assets 1 ash and Investments 9,558 2 Accounts Receivable Grants Receivable 5,000 4 Govn't Grants & ontracts Receivable Pledges Receivable 1,200 6 Prepaid Total urrent Assets 17,583 8 Long Term Assets Long Term Pledges Receivable 1,000 9 Building Improvements (5 yr lease) 8, Equipment & Furniture 14, Accumulated Depreciation (12,500) 12 Total Long Term Assets 10, Total Assets 28,083 Liabilities Items owed by the nonprofit urrent liabilities are due within 12 months Long term liabilities are debts or loans due after 12 months 6

7 Liabilities Payables Amounts due to others for goods or services the organization received Amounts due to others for loans (notes) Net Assets Sum of income less expenses since the start of the organization Dollars that you have to go forward an display board designated amounts Relationships Between Balance Sheet and Statement Balance sheets can be displayed with columns for without donor restriction and with donor restriction. The change in net assets (line 22) will tie to the unrestricted and restricted amounts on the surplus/deficit line on the income statement (financial statement B, line 28). 28 Surplus/(Deficit) 1,372 25,000 26,372 7

8 ash Flow Statement Based on activity during a specified period of time Displays the dollar flow of money in and out of the organization to arrive at the cash balance at the end of the period Separated into three sections Operations core business activities Investing fixed assets (equipment/buildings) & investments (stock, mutual funds) Financing debt and loans Two methods direct and indirect Indirect Method Operating section Starts with the surplus or deficit for the year Then removes all non cash transactions Depreciation not yet received (receivables) not yet paid (payables) Investing section Outflow of money for assets purchased Inflow of money for assets sold Financing section Inflow of cash for money borrowed during the year Outflow of money to pay down loans Sum of changes in the three areas is the net change in cash for the period Add the change to the prior period cash balance to arrive at the current period cash balance D Analyzing Financial Statements Financial statements can be analyzed to determine questions that should be asked How do you analyze financial statements? ompare current period balances to prior period balances (trend analysis) ompare current period balances to budgeted balances ompare balances across accounts to determine increases or decreases that seem unusual 8

9 Example Balances that Lead to Questions Negative unrestricted net assets balance Negative net assets balance Increasing payroll payable or payroll taxes payable Example of negative unrestricted net assets balance E Uses for Financial Statements Grant applications and reports Annual reports IRS Form 990 preparation Provide information to donors These are all examples of external ways to use financial statements. Uses for Financial Statements ompare actual results to budgeted results Project future balances or year end balances alculate ratios and benchmarks Measure performance against external thresholds Measure performance against internal thresholds These are all examples of internal ways to use financial statements. 9

10 Hungry for More? Nonprofit Assistance Fund (will have new name!) NAF s Youtube hannel IRS Exempt Organization non profits TechSoup andhow tos/quickbooks and accounting resources Presenter ontact Information Molly Granzow, senior accountant Abdo, Eick, & Meyers, LLP molly.granzow@aemcpas.com Becky Johnson, finance director Minnesota ouncil of Nonprofits bjohnson@minnesotanonprofits.org 10