The “Good” Organizations: what do they do?

15 Aug

August 15, 2012

Let’s talk about what “good” organizations do with their financial reporting.

When it comes to financial reporting, at the very minimum, the good organizations:

(1)    Prepare a full reporting package each month.  This package can contain as much information as you like, but at the very minimum, it should have a Balance Sheet (typically called a Statement of Financial Position), an Income Statement (typically called a Statement of Activities), and a Cash Flow Statement.  If you as a member of management or the board are not getting all three, you are not getting a complete picture of your organization’s finances.  Imagine trying to follow a football game when you can only see half the field.  This would complicate the coach’s job.  Is your job being complicated by incomplete financial reports?

(2)    Timeliness.  The good organizations can produce their monthly reporting package quickly each month, sometimes within just a few days of month-end, but definitely with a week or two of month-end.  The older information gets, the less helpful it is for you to run your organization.  Using our football analogy, try coaching a game in the fourth quarter when all you can see is what happened in the 1st quarter.

(3)    Bank and investment account reconciliations.  People have to reconcile their checkbooks each month to their bank statements; so do organizations.  The good organizations get this done each month before they release their monthly reporting package.  If your organization does not reconcile its accounts on a timely basis each month you are subjecting yourself to a whole host of potential internal control problems, not mention a good probability that your financial reports are misstated.

(4)    Able to report at various levels of detail.  The board needs summary reports, the finance committee needs additional details, and the executive director needs all the details.  The good organizations have their chart-of-accounts, their data, and their accounting software all configured properly to allow this to happen efficiently.

(5)    Able to report financial information separately by program, department, cost centers, and by funder.  As in number 4 above, a good organization can “slice-and-dice” its financial information in a variety ways that will aid it to better run its programs and departments and be better able to report to funders.

(6)    Reporting on restricted funds.  This might be the single biggest area in which nonprofit organizations run into trouble: mismanaging their restricted funds.  If your funder restricted the use of their funds for purpose A, but you spend it on purpose B, you could have a serious problem.  Do your financial reports make this clear?  The good organizations are on top of this.

(7)    Budgeting and forecasting on both an accrual and cash basis.  Assuming an organization is on the accrual basis (if I get some requests to explain the difference between cash and accrual, I can explain this in a future blog) the good organizations know how to plan using both.  If you budget and forecast only on an accrual basis, you don’t know your cash flow which can lead to some obvious problems.  If you budget and forecast only on a cash basis, your budget will not align with your monthly financial reports, making it very hard to explain variances.

We at YPTC consider these seven essential basic traits to be best practices in financial reporting.  We coined a name for this:  the Financial Reporting Baseline™ or FRB™ for short.  Show me an organization that does not or cannot perform these seven basic practices, and I will show you an organization that is probably in the “bad” or “ugly” categories!

Comments welcome.

(This blog post is based on an article I originally published in Don Kramer’s Nonprofit Issues titled “Don’t Operate Blind:  Jump-Start Your Accounting Department.”)

Eric

Eric Fraint, President and Founder
Your Part-Time Controller, LLC

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