Reading the financial reports
Administrative Services is trying to provide regular and standardized financial reports for Free Geek. The exact format of these reports will evolve over time, but there are a few reports that follow common practices in nonprofit organizations.
Definitions and Concepts
First, it is important to know the four basic types of accounts and what they represent:
- Income (or Revenue)
- This is the money that we receive.
- Expenses
- This is the money that we spend.
- Assets
- This is the value that we have.
- Liabilities
- This is the debt that we owe.
Each of those major types of accounts are broken down into many natural accounts, such as "Repairs:Keys, Locks, and Doors" which is fairly self-explanatory. Because we are a nonprofit, it is important to also understand that we need to track functional accounts, such as income and expenses related to a particular program (i.e. Hardware Grants), as well as all the programs vs. money spent or earned via fundraising vs. expenses related to general management.
Now, we can look at the main reports to see a clear picture of Free Geek's finances:
Statement of Financial Position
In some other types of organizations this is called a balance sheet. This report is a snapshot of our assets and liabilities as of a certain date. Some assets are more liquid (easy to spend) than others. For example, money in the bank is very liquid. Value tied up in our truck is not. Further, some money in the bank has strings attached to it, for example money designated by a donor for a specific purpose (like the grant to renovate our classroom). Therefore, this report lists the major natural asset and liability accounts, but there are four columns:
- Total
- Temporarily restricted
- Other non-liquid
- Liquid
The assets are totaled in each column as are the liabilities. The difference between the assets and the liabilities is called the fund balance.
Statement of Activities
In some other types of organizations this is called an income and expense statement or a profit and loss statement. It list all the income and expense activities for a period of time. Some income has strings attached to it, for example money designated by a donor for a specific purpose and is listed as restricted. Therefore, this report lists the major natural income and liability accounts, but there are three columns:
- Unrestricted
- Temporarily restricted
- Total
Free Geek has no permanently restricted income streams. If we did, there would be a fourth column.
Statement of Functional Expenses
This is similar to the Statement of Activities but lists only the main natural expense accounts. These expenses are then broken down into columns:
- Program
- Management and general
- Fundraising
- Total (for this period)
- Total (from a previous period)
Cash Flow Statement
(no information here yet.)
Key Ratios
This is a summary report that pulls numbers from other reports.
Once the above reports are in place, it becomes possible to look at various ratios that help people judge an organization's health. For example, we can pull the liquid assets from one report and the total expenses from another to calculate how many days or weeks of operating expenses we have on hand. Similarly, we can calculate how many cents it takes us to raise a dollar by fundraising.
We can also calculate what percentage of our expenses go toward programs (a rule of thumb is that this number should be 80% or so), management and general (10% or less), and fundraising (10% or less).