Elegant Reporting in Nonprofit Accounting
Elegant Reporting in Nonprofit Accounting
For the final installment in our Elegant Financial Systems series, we are turning to elegant reporting. The whole point of designing an elegant accounting system is to produce elegant reports – useful, cogent information to help us make decisions, inspire our staff, build trust among our stakeholders, and align our use of resources to meet our mission goals. The work we put into designing and building an elegant chart of accounts, cost centers, and allocations provides the foundation for creating meaningful reports, dashboards, and visualizations that tell our nonprofit financial story.
Nonprofits spend a lot of time looking at their financial past
One of the most familiar nonprofit financial statements is the statement of activities or income statement – sometimes called a profit and loss or a revenue and expense statement. In their most basic form, these reports show rows of revenue items at the top, rows of expense items below, and the net of the two (surplus or deficit) at the bottom. Most nonprofits routinely go further by comparing these revenue and expense activities against the year-to-date and/or annual budgets for the organization. No matter the particular form, the information provided on a statement of activities or a budget versus actual report is a record of the past – a bit of nonprofit financial history.
We add value to the history lesson by analyzing variances between what we expected to earn or spend on particular programs or line items and the actual amounts we incurred. Variance analysis can provide useful insight into how we have been using our resources. A sophisticated reader of a budget versus actual report knows not to assume that being under budget is always a good thing. Because budgets are estimates of the resources needed to accomplish our mission goals, being below budget on expense items can point to areas where our organization is not following through on its plans.
An elegant financial report offers just the right amount of information
When using an elegant financial systems approach, we intentionally limit the number of revenue lines and expense lines we display when presenting a statement of activities. Including too much detail only begs questions about line items that may not matter much to our mission or financial success. When we designed our elegant chart of accounts, we included rollup accounts or account groups we could use to summarize our revenue and expenses.
Along with limiting the number of accounts shown on a financial report, choosing how to group those accounts can also heighten the effectiveness of the report. In the following example, we organized the revenue items into two categories – contributed income and earned income. Attracting contributions and earning fees for services are very different types of activities, each requiring different infrastructure, staff expertise, and financial management. It makes sense that we would display them separately.
Contributed Support and Earned Revenue
Among the expenses, we rolled up the line items into groupings that represent our largest resource outlays – personnel cost often leading the way for nonprofits because our talented staff are at the heart of nonprofit mission success. Whatever the rollup accounts, they should reflect the resources we need to accomplish our mission and program goals. Our expenses show the investment required to produce the good outcomes we have promised to our clients and other stakeholders.
Expense Rollup Accounts
How to tell your nonprofit financial future
Perhaps more useful even than a well-designed statement of activities is a well-designed statement of financial position or balance sheet. While history lessons taught by a statement of activities are necessary, the real power of elegant financial reporting is predicting the future. If we purposefully display and smartly interpret the information on our statement of financial position, we can glimpse the direction our organization is heading financially.
Regardless of whether your organization was over or under budget last quarter, knowing if we have enough cash and/or net assets on hand to use for the coming quarter may be the more pressing question. One way to answer this question is by classifying our balance sheet both by donor restriction and by maturity. A classified balance sheet allows us to see what resources are on hand and available to deploy for mission work in the near and not-so-near future. Preparing our financial statements with classifications also helps satisfy the requirements of Accounting Standards Update 2016-14. Not only are we producing smart financial reports, we are also producing audit-ready financial reports.
Classify a statement of financial position by restriction and maturity
Using separate columns to designate those assets, liabilities, and net assets without donor restrictions and those with donor restrictions helps us track what resources are most flexible and readily accessed. For example, showing the portion of our cash accounts that is without donor restriction gives us a true sense of what we could spend on an emergent need. Any cash that carries donor restrictions is still valuable, of course. However, its use is restricted to particular purposes and/or future periods. Seeing the clear distinction between cash without and with donor restrictions helps us avoid inadvertently spending funds intended for another purpose or time.
Similarly, if we classify our assets and liabilities by maturity, we gain more insight into what resources are immediately available and what obligations are due in the near future. Current assets and liabilities are those resources or obligations that we expect to receive or pay within one year of the statement date. A common measure of the relationship between our current assets and our current liabilities is the current ratio. Even without knowing the definition of a current ratio, we can tell from our balance sheet whether our current assets are equal to or greater than our current liabilities. Do we have enough ready assets to cover the debt we owe in the short term?
Classified Statement of Financial Position
Financial dashboards help focus our attention
While we can always use the actual financial statements to get the raw data to answer our financial questions, using a graphic representation of the same information can help focus our attention. In the example above, we can look at the total dollar amount of the current assets and compare that to the total dollar amount of current liabilities.
A quicker way to point our board members to this relationship (the current ratio) is to show them a graphic that compares the relative size of the two numbers. A double bar graph like the example below makes it obvious if we have enough current assets to cover current liabilities. If the bar representing current assets is taller than the bar representing current liabilities, we are good to go. If not, we know we are in a precarious spot. We do not even need to know the dollar amounts involved to grasp the financial implications. This simple example shows the power of a clear visual.
Current Ratio
Visual benchmarks for financial data
Setting a financial goal for our organization can take many forms. We could strive to finish our year with a certain amount of operating surplus to grow our reserves. We could set a revenue goal for a capital campaign to acquire sophisticated accounting software and upgrade our staff computers. As in the example below, we could set a threshold for the minimum amount of operating reserve we would like to have on hand.
Because a goal is simple or straightforward does not diminish its importance. True for any nonprofit, understanding how much cash we have available to cover day-to-day operations is vital. One useful measure is days cash on hand. This benchmark divides our anticipated annual cash outlays by 365 to come up with the amount it takes to cover a day of organizational activity. We divide the total cash without restrictions by the daily amount to come up with the equivalent in days cash on hand.
We can make this basic measure of liquidity even more useful by trending the figure over time. There is no standard operating reserve that fits all nonprofits. Each nonprofit sets its own target based on its business model and receivables cycle. In the example below, the nonprofit set its Target Operating Reserve at 120 days of cash on hand. Trend lines can show us larger patterns at work and the big picture about where our organization is headed. We can use trend analysis to get at the “why” questions underlying our financial activity.
Cash on Hand
Trend Analysis in Visual Form
Ratios are relationships. As we grow to understand our nonprofit business model, we come to see how our reliance on certain sources of income defines our financial strategies. Each type of income has defining characteristics. Some income types carry more risk. Some income sources require more time and effort (i.e. cost) to acquire. Based on the characteristics of each revenue type, we can choose the ideal mix of how much of each type we would set as our goal.
A great measure of our relative dependence on various income sources is the reliance ratio. The ratio compares the relative amount of each revenue source to the total revenue our organization receives. By monitoring this ratio, we can proactively manage how reliant we are on any one source. We can set goals to increase or decrease our dependence on any one source.
A pie chart provides immediate visual feedback about the relative proportion of each revenue source to our total revenue. Showing a series of pie charts of the reliance ratio allows us to track how our reliance on each revenue item is changing over time. If we have set target amounts or target percentages for types of revenue, we can adjust our plans and strategies to try to reach those goals.
Reliance Ratio
Elegant financial reporting elevates sums to strategies
The end goal of an elegant accounting system is to produce elegant reports – information that clarifies the questions at hand, focuses our decision-making on relevant facts, and reveals the connections between financial information and strategy. Nonprofits that develop the capacity for sophisticated reporting are better able to tell their financial story and better able to align their financial resources in service of their mission.
In our next blog, Kathy Jastrzebski will show us how to create the elegant reports and dashboards mentioned in this article in Sage Intacct. Please subscribe to the Innovation in Nonprofit Finance blog to receive notice by email of future blogs immediately when they post.
Curtis Klotz is a CPA serving as director of nonprofit innovation at CLA. His writing is inspired by his work in CLA’s nonprofit consulting and business operations practice and more than 30 years of industry experience. Before joining CLA, Curtis was vice president of finance and CFO at Propel Nonprofits, where he was a frequent online contributor to Nonprofit Quarterly and other blogs. He was named Minneapolis/St. Paul Business Journal’s Nonprofit CFO of the Year in 2017, and is past chairperson of the Montana Nonprofit Association. Curtis graduated summa cum laude from St. Olaf College with majors in women’s studies and religion.
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