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Reading and Analyzing Non Profit Financial Statements
10-08-2014
Responsibility for an organization’s financial reporting is shared among three parties — management,
The board and the external auditor — as follows:
• Management, which is responsible for preparing financial reports
• The board, which is responsible for overseeing management and its financial reporting processes and satisfying itself as to the appropriateness of financial reports for those outside the organization; and
• The auditor, who is responsible for making an independent assessment of the financial
statements, and giving a professional opinion on whether they give a fair presentation of
the organization’s financial position and results of operations
Understanding a non-profit organization's financial statement is not hard. Reading a non-profit balance sheet is easy if you keep a few basic ideas in mind.
All businesses (including non-profit organizations) must produce a financial statement at least annually and often quarterly. This financial statement includes a balance sheet, an income statement, and a cash flow report, and possibly other supporting documents. These various reports will spell out the financial activities of the organization during that time period, detailing all income and cash outflows including operating expenses, salaries, and the like.
A non-profit’s purpose is not related to profitability or returns to investors, the objectives of its financial reports differ from the objectives of for-profit financial reports. The primary users of a non-profit’s financial statements are also primarily funding sources, albeit a different type, and for different reasons. Non-profit financial statements are used by funding sources such as donors, foundations and various federal, provincial and local government agencies. These funding sources have their own very unique needs.
Although they do report certain information which is similar to information reported by for-profit enterprises, including an overall picture of financial condition, operating results and cash flows, financial statements of non-profit organizations are focused, in large part, on the sources of funding received and how those funds are managed and used. Because non-profits rely on funding from public sources to provide services, they have a fiduciary and legal responsibility to use those funds in accordance with specific guidelines, rules and regulations. For this reason, and, in order to promote the highest level of transparency and accountability, non-profits are required to make their tax returns and financial statements available to the general membership unless they are publicly held, for-profit companies have no such requirement.
Tips for Non-profit Organization Financial Statement Analysis
· Take the time to research the sector the non-profit operates in and their mission and activities. Understanding the mission and the basics of their operations will help you understand their financial statement.
· Read the statement of Operations that breaks down the sources of income. This might include dues, conference registrations, advertising and donations. Read the statement of functional revenue sheet that breaks down the nonprofit’s expenses. The total cost for staff compensation will be listed, along with office, conference, website, publishing and other operating expenses. Read the balance sheet to see the difference between the organization’s beginning and year-end balances of assets and liabilities. Review any other additional forms and supplemental documents that might interest you.
Footnotes: Footnotes: This column is presented as a general source of information only and is not intended as a solicitation for business. It is always recommended that you consult a qualified tax professional beforeembarking on any of the suggestions outlined above. Mohammed Yasin, CGA, is the principal of M. Yasin & Co. Inc., Certified General Accountants and has offices in Vancouver & Surrey,B.C. For more information on this topic or any other taxation matters, please contact taxes@alameen.ca.
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