How You Know an Organization Is in a Good Financial Standing?

Understanding Your System's Financial Statements

Agdex#:	057
Publication Engagement:	11/96
Order#:	96-037
Last Reviewed:	xi/97
History:	Replaces #92-098 Understanding Your System'southward Financial Statements
Written by:	Katharine Schmidt - Rural Leadership Consultant/OMAFRA

Tabular array of Contents

1. Money: Who Needs It?
2. Cash vs Accrual Accounting - Which Practise Y'all Use?
3. Types of Financial Statements
4. Budget
5. Income Statement
6. Project or Event Report
7. Rest Sheet
8. Your Organization's Financial Health
9. Conclusion
10. References
11. Related Links

Money: Who Needs It?

Many non-profit organizations rely on limited funds to accomplish their goals and run their programs. The management of these funds is the responsibility of its members, directors and executive. The proficient or bad direction of an organization'south finances will contribute to its success or failure.

Cash vs Accrual Accounting - Which Do Y'all Employ?

There are ii common accounting systems or methods for keeping runway of an arrangement'due south financial situation: cash and accrual. Cash basis accounting recognizes transactions when the greenbacks changes hands. Many pocket-size clubs or organizations with relatively few transactions each month utilize this organisation.

Accrual basis bookkeeping recognizes income when it is earned and expenses when they are incurred. Under the accrual method, a beak that must be paid by the system is included as a liability and coin that the system is owed is listed as an nugget on financial statements. Accrual footing accounting gives a more than accurate financial motion-picture show than cash ground accounting. This Factsheet describes financial statements typically used in an accrual system.

Types of Financial Statements

The financial situation of an organization is shown to its members through various types of statements. They include:

• Budget
• Income Statement
• Project or Event Report
• Residual Sheet

All financial statements indicate the type of statement, the organisation'southward name, and the date or time menstruation it covers.

Upkeep

A budget is a written plan that forecasts income (acquirement) and expenses (disbursements) for a specified period of fourth dimension (usually i twelvemonth). Expressed in dollars, the budget is based on an system'south goals and ensures realistic planning of programs. Through its utilize, members can control and co-ordinate finances and programs.

Before blessing the upkeep for your organization, check that the activities planned by your organization are receiving adequate funding and that all expenses are accounted for. As shown in Figure 1, a budget indicates predicted revenue, predicted expenses, and a predicted cyberspace income or loss (revenue less expenditures).

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Figure 1. Morton Rural Customs Organization Budget (January 1, 1999_ to December 31, 199_)

Revenue
Grants	$1700
Membership Fees	2500
Donations	400
Fund Raising	1200
Miscellaneous	150
Total Revenue	$5950
Expenses
Assistants	$2500
Meetings	600
Travel	600
Promotion	250
Honoraria	one thousand
Supplies	400
Total Expenses	$5350
Net Income	$600

Note: If the net income is bracketed ( ), the organization anticipates a deficit or loss position for the time flow reported. It is in the red!

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What To Look For:

• The budget should exist consistent with the organization's goals and plans.
• Check that revenues and expenses look reasonable. You may want to compare it with previous budgets and income statements.
• If expenses are greater than revenues, does the organization have surplus funds to encompass the loss?
• Ensure that the Board of Directors approves the budget earlier money is spent.

Effect or Project Budgets are useful in planning specific projects or programs during the yr. A projection budget uses the aforementioned format as the budget and shows greater particular on a specific project or outcome.

Income Statement

This report, also known as a Statement of Operations or a Statement of Receipts and Disbursements, gives a picture of how much money was earned (revenue) by the organization and how much money was spent (expenses) over a specified period of time.

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Figure 2. Morton Rural Customs Organisation Income Statement (January 1, 1999_ to Dec 31, 199_)

	Jan ane to December 31 Actual	Budget for Yr	Variance
Acquirement
Grants	$1600	$1700	$(100)
Membership Fees	2900	2500	400
Donations	500	400	100
Fund Raising	1100	1200	(100)
Miscellaneous	100	150	(50)
Full Revenue	$6200	$5950	$250
Expenses
Administration	$2800	$2500	$300
Meetings	500	600	(100)
Travel	500	500	0
Promotion	400	250	150
Honoraria	chiliad	m	0
Supplies	500	400	100
Depreciation	100	0	100
Total Expenses	$5900	$5350	$550
Net Income	300	600	($300)

Notation: Revenue and expenses budgeted for the year are compared to the bodily revenue and expenses at year finish. The variance indicates whatever difference between the amount budgeted and the amount actually received or spent. The departure may also be shown equally a percent difference of the budgeted amount.

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The income statement measures the actual progress of the organization as shown in Figure 2.

It is unremarkably completed at the stop of a fiscal year and is compared with by and futurity budget projections. It can also be prepared periodically through the yr to check progress and make sure that all plans are on rail.

The categories used for revenue and expenses are the same categories used in the organization'south upkeep (run into Figure 1).

What To Look For:

• Reasons for any significant differences between upkeep and actual should be explained.
• Reasons for unbudgeted revenue and expenses should be explained.

Project or Result Report

Organizations ofttimes prepare a financial statement to report on specific programs or events. Projection reporting not only gives an accurate financial record of activities or events but is also helpful when planning future events.

Figure 3 shows an instance including a annotate department explaining details of the projection.

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Figure three. Morton Rural Community Organization (Project) Report - November 22, 199_

	Projected Budget	Actual
Acquirement
Sponsorship	$600	$700
Grant	200	200
Registration Fee	150	125
Total Revenue	$950	$1025
Expenses
Room Rental	$350	$350
Speakers	400	400
Refreshments	75	100
Certificates	eighty	85
Total Expenses	$905	$935
Net Income	$45	$90

Comments:

• Upshot was very successful with 25 participants.
• Evening fourth dimension slot preferred for future events.
• Certificates were appreciated.

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Residue Sheet

A balance sheet is a summary of the financial position of an organization at a specific point in time (Figure 4).

As shown in Figure 4, a remainder sheet has three parts.

one. Assets

Annihilation of value that the organization owns. Your organization may have one or several of each of two types of assets listed in its remainder sheet.

Electric current Assets are money or items of value which can be readily converted into cash. Examples include securities, inventories (items for sale and supplies to exist used), prepaid expenses, and services.

Fixed Assets are property or equipment that is expected to terminal longer than one year.

Fixed assets may be reported by original cost, market place value (corporeality asset could be sold for) or by depreciated value. Depreciation spreads the cost of an asset over its useful life. The annual toll of depreciation (determined past published schedules) will be shown on the income statement (Figure 2). The remaining asset value is carried forward and reported on the residuum canvass.

The value of the office equipment in Figure iv has been depreciated. Country is not depreciated since it is not consumed over fourth dimension and seldom declines in value. Notes relating to the valuation of fixed assets are unremarkably included in the remainder canvas or are attached as an appendix.

two. Liabilities

Debts or amounts owed by the organization. This includes coin owed to suppliers for services and amounts owed to employees for wages or salaries.

Electric current liabilities are obligations due and payable within one twelvemonth (including whatever loan principle payments).

Long term liabilities are obligations such as loans or a mortgage to be paid off in more than one year.

3. Disinterestedness, Net Worth or Capital letter

Equity = Avails - Liabilities

Reviewing the association's equity is important because it shows the accumulated worth of an organization. In Figure 4:

Disinterestedness = $15,800 - $two,350

= $thirteen,450.

Human relationship between the Income Statement and the Residuum Sheet

The net income (or loss) from the Income Statement in Figure ii = $300) is brought forrard to the Remainder Sheet (Figure 4 - disinterestedness). To obtain the year end equity position, cyberspace income is added or internet loss is subtracted from the disinterestedness position at the starting time of the year.

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Effigy four. Morton Rural Customs Organization Remainder Sheet (December 31, 199_)

Assets

Current Assets
Cash	$600
Accounts Receivable	200
Total Current Assets	$800
Fixed Assets
Office Equipment (depreciated value)	$5,000
Land (marketplace value)	ten,000
Full Fixed Assets	$xv,000
Full Avails (at market value)	$xv,800

Liabilities

Current Liabilities
Accounts Payable	$2,000
Loan Payment (due in 12 mos)	350
Total Current Liabilities	$2,350
Equity
Equity at beginning of year	$13,150
Net Income	300
Disinterestedness at finish of year	xiii,450
Total Liabilities+ Equity	$15,800

Note: A residue sheet must always be in balance!

Total Assets = Total Liabilities + Equity

$15,800 = $ 2,350 + $13,450

= $15,800

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What To Look For:

• What items are included under accounts receivable? When are these accounts to exist received? Are they overdue? Is there any possibility of not receiving the money that is overdue?
• What items are included under accounts payable? When are they due? Is at that place plenty cash to cover them? (meet Financial Ratios)
• Compare the current balance sheet with previous years' statements. Identify any trends that might be an indication of changes to the financial wellness of the arrangement. (Change in equity.)
• Yous may want to discuss whether or not the arrangement is fully insured for the replacement value of assets.
• If there are whatever investments, are they earning a reasonable charge per unit of render?

Your System's Financial Health

Financial Ratios

Financial ratios tin can be used to evaluate the financial stability of an organization. Information from the residuum sheet is essential to calculate financial ratios. Table 1 shows two types of ratios and how they are calculated.

Tabular array 1

Ratios	Calculation	Organization Example
Liquidity
Electric current Ratio	Electric current Assets/Current Liabilities	$800 / $2,350 = 0.34
Debt Financing
Percent Debt to	= (Full Liabilities / Total Assets) ten 100
Avails
Ratio	= ($2, 350 / $fifteen, 800) x 100	= 15 %

Liquidity refers to the ability of the organization to meet cash obligations as they come due in the short term (less than 12 months) and is usually measured past the electric current ratio.

A current ratio of .34 indicates at that place are 34 cents worth of electric current avails to back up each dollar of current liabilities. A current ratio of less than 1 ways that in that location are insufficient electric current avails to comprehend curt term debt. This could crusade greenbacks flow problems. An organization that has its current ratio greater than one would exist able to pay its immediate bills from currents assets.

Debt financing refers to the ability of an organization to cover debts. The lower the ratio, the less risk of fiscal difficulties for the organization and less risk to creditors.

In this example the Percent debt to assets ratio shows that merely fifteen% of assets are encumbered past debt. This is a potent fiscal position. An arrangement with a debt to assets ratio of over 100% would be in a very weak position.

Conclusion

Members larn almost the financial health of their arrangement by reading the financial statements. Information technology is your responsibility as a director or member to sympathize the financial statements of your system. You lot will and so be able to determine the fiscal condition of your organization and make sound financial decisions to ensure that it remains good for you.

References

Financial Management - Skills Plan for Management Volunteers. Kent, Judy and Dorothy Strachan. Skills Programme, 1985.

Financial Management for Community Groups - The Voluntary Action Resource Centre. Grange, Alix and Margaret Vrabel. 1984.

Ontario Ministry of Agriculture and Food - Money Matters: A Guide to Farm Financial Planning. Publication 379. 1990.

• Being a Social club Treasurer - The Nuts
• A Guide to Bookkeeping for Non-Profit Organizations

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Source: http://www.omafra.gov.on.ca/english/nfporgs/96-037.htm

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