Creating a 5 Point CFO Report
Providing monthly financial statements to the president or executive director of a non-profit organization is essential to help them guide their organization to meet their strategic objectives, but the financial statements should be geared towards board members, too. Unfortunately, many executives and board members may not understand what they are looking at. To help these decision makers, the CFO can provide some pointers in a brief narrative report.
I call this a Board Summary CFO Report, which includes up to 5 points highlighting critical items on the recently provided financial statements. Examples of areas I’ve recently covered are as follows:
1) Cash is the lifeblood for many organizations, but the amount disclosed in the financial statements can be misleading. I like to disclose cash, including money market accounts, as an amount and as a % of total assets. This should be followed with the amount that is restricted. Unrestricted cash is needed to cover operational expenses including payroll, rent and other administrative items, but using any restricted cash for an unrestricted purpose will cause future problems.
2) Disclose the current amount of accounts receivable as this provides insight into future cash flow. Discuss whether there is an increase or decrease, the future collectability of the receivables, and whether any has been written off to bad debt. I find it helpful to disclose the expected collection date, as this account might be substantial due to multiple multi-year grants that won’t be paid until future years.
3) Discuss the current liabilities, which would include accounts payables, credit card liabilities, and payroll liabilities. Disclose this in total and as a % of total assets which can be compared to the cash % disclosed in #1 above. Also remark about how quickly the liability is paid off. If the liability continually grows and the age of many payables is over 90 days, a discussion of the operations needs to be held to understand the cause and potential remedy.
4) The retained earnings for a non-profit organization is called net assets. There can be three types which are unrestricted, temporarily restricted, and permanently restricted. Restrictions are imposed by the donor. Unrestricted assets are used to pay the majority of administrative and fundraising expenses, while restricted assets are mostly used to pay for programmatic expenses or other items the donor stipulates. I usually include a trend analysis of these three categories of net assets to identify negative patterns that need to be addressed.
5) Disclose any current grant revenue and whether it is restricted or for a multi-year program, as future expenses may be incurred in a period when no revenue is being disclosed. Likewise, I like to point out that revenue recognized in a prior period is being used to fund current period expenses. This clarifies whether the organization is operating within its means. In addition, I like to isolate the top two or three largest expense types, typically payroll, occupancy and professional fees and disclose the variance to their budget. Any unusual expenses and large variances are also noted.
After the five points, add a note for any new grant or new items such as rent changes that are known but will affect future financials. Remember that this report is just a summary and used to bring light to items that may need to be discussed further. Hopefully, the president or board members will use this report to help interpret the financials and make better decisions.
A CPA since 1998, Doug Whitescarver is the Client CFO at Lumix CPAs and Advisors with over 20 years of experience in accounting and management. He is responsible for all aspects of Lumix’s Client Accounting Services. Doug has extensive tax experience and previously served as an audit manager. He is a soccer coach, fisherman, and avid outdoorsman.