“How to Determine the Viability of a Nonprofit Agency”

By Verna Campbell Malone, Vice Chairman of the Legacy Bank – The Private Bank, Member FDIC

Published in Community Connections, 2006-07

Financial statements are the window to an agency’s overall health

Among the many roles and responsibilities of non-profit board members, perhaps one of the most important is that of fiduciary responsibility.  In essence, this means ensuring that the agency is being a good steward of donors’ funds and ultimately, protecting the public’s trust.  One of the best ways to ascertain the financial health of an agency is by reviewing its financial statements.

The first step in analyzing the audited financial statements is to read the independent auditor’s report, or opinion letter, attached to the statements.  This letter will tell you if there are any internal or operational control weaknesses and often provide suggested solutions and management’s response.   As a board member, focus on the following information when reviewing the financials.  Here is a key for reading a financial statement.
 

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

The balance sheet is recognized as the most important of all the financial statements due to the information contained in it.   It is a snapshot of the financial situation of the agency at a specific date.   The balance sheet represents and is arranged by the organization’s financial assets, liabilities and net assets.   Assets = liabilities plus Net Assets.

STATEMENT OF ACTIVITIES (INCOME STATEMENT)

The income statement is a compilation of the revenues from all sources and expenses of the nonprofit.   It looks at the financial situation of the agency over a period of time.  In reporting these financial elements, the income statement will form a conclusion as the excess of revenue and support over expense (operating margin) and the change in net assets (net margin).

STATEMENT OF CASH FLOWS

This statement reports the sources and uses of the nonprofit’s short-term cash and cash equivalents for the period concurrent with the statement of activities (income statement).  In other words, it is a summary of the source of the organization’s cash and how it is used.

STATEMENT OF FUNCTIONAL EXPENES

The primary functional classifications are:
Program Services - activities that result in goods and services being distributed to beneficiaries, customers or members that fulfill the purposes or mission of the nonprofit.
Supporting Activities – management, general, fund raising and membership development.

NOTES AND FOOTNOTES

This section provides additional information to the knowledgeable reader about the nonprofit’s financial policies and procedures.  Many footnotes and notes are required by generally accepted accounting procedures (GAAP).  These notes are a great source for information about the nonprofit’s financial and accounting treatments.

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