Want to learn more on this subject? We’ve partnered with the author for a free webinar on April 5, 2018. Can’t attend the live session? Everyone who registers gets the full recording afterwards! Click here for more details and registration.
In the nonprofit sector, the answer to the title question will almost always be a resounding “YES!”. Being able to read and understand financial statements and reports helps board members and senior staff both run more effective organizations and protect the assets and reputations of both the organization and its directors.
Many charities and nonprofit organizations experience one or more of the following financial calamities at some point in their history:
- Insolvency or bankruptcy
- Lack of cash flow
- Loss of registered charitable or nonprofit status for income tax purposes
- Occupational (employee) theft, fraud or embezzlement
In fact, according to the research, occupational theft, fraud and embezzlement alone hits more than one-third of all organizations every two years. Actually, the numbers vary from 32% to 56% depending on the year. It is much more common than most people realize.
In any charity or nonprofit organization, one of the most important skills that everyone can bring to the table is the ability to read and understand the financial statements and reports for their organization.
For senior staff, the primary benefits of being able to read and understand financial statements and reports are as follows:
- Better understanding of the strategy and operations of their organization
- Better financial decision making
- Better long-term organizational financial sustainability
- Lower organization financial risk
- Lower stress and anxiety due to lack of financial understanding
- Greater ability to attract good board members and funders
For board members, in addition to the list of benefits above, learning how to read and understand financial statements can help them become more effective board members and also reduce their personal financial risk.
Many directors do not realize that when they become a board member, they take on a significant responsibility and they can be held accountable. Not all personal financial risks can be covered by directors’ and officers’ insurance, and, in addition to other financial risks, directors can generally be held personally responsible for all of the following:
- Up to six months of unpaid staff wages and benefits
- Unpaid payroll remittances to the CRA
- Unpaid Goods and Services Tax (GST or HST) remittances to the CRA
Under the new British Columbia Societies Act, senior staff take on many of the accountabilities that were previously only required of directors. As a result, learning to read and understand financial statements and reports is becoming increasingly important for everyone.
For people who don’t have a financial background, learning to read and understand financial statements and reports can seem like a daunting task. As a result, many choose never to learn these skills, and spend the rest of their tenure with the organization assuming that someone else (e.g. the CEO, treasurer, finance and audit committee, or the bookkeeper) will look after all the financial details. This is a high-risk strategy because board members (and senior staff) can be held individually accountable. For many board members, this causes anxiety and stress.
In many organizations, the bookkeeper is the most financially sophisticated person in the organization. Unfortunately, many bookkeepers don’t have the financial skills required to protect the organization and its directors. Even with a good bookkeeper in place, however, it is highly recommended to have someone with significant financial skills reviewing their work.
In fact, the more people in the organization that can read and understand financial statements and reports, the better. In an ideal world, in addition to a great bookkeeper, every organization in the nonprofit sector would have the following:
- A designated, professional accountant (CPA) as their treasurer
- A designated, professional accountant (CPA) as their chief financial officer (CFO) and/or controller (can be part-time for even the smallest organizations and can also be a volunteer role)
- A financially sophisticated board of directors where all directors feel comfortable reading and understanding financial statements and reports.
With a little effort, learning to read and understand financial statements does not have to be a herculean task. There are some fairly easy ways to help staff and volunteers read and understand nonprofit financial statements.
The best free, written resource in Canada is A Guide to Financial Statements of Not-for-profit Organizations. It is written by accountants, and a couple of re-reads may be needed when reviewing some of the material, but it is comprehensive and well written. An explanation of each of the typical financial statements is provided, along with examples of the types of questions that directors should be asking about each statement in order to fulfil their due diligence role.
Offering training to your board members and senior staff is an excellent way to improve their financial understanding and skill sets. In addition to bringing in your auditor to review the annual financial statements at a year-end board meeting or at your annual general meeting, consider engaging an expert during the year and holding a training session about your organization’s finances. This is especially useful for new board members.
There are also short courses non-financial people can take to increase their understanding of financial statements. Color Accounting is a program that teaches non-financial people how to read and understand financial statements. They offer options of both in person and online learning methods.
As with most things, practice makes perfect. If you have questions about financial statements and reports, keep asking until you get the answers you need to feel comfortable. Request a meeting with your treasurer, the board chair or someone in your organization that you are confident has some financial skills.
But the easiest way to “dip your feet in the water” is to attend a free one-hour webinar. CharityVillage is sponsoring a one-hour webinar called How to Read and Understand Financial Statements: A free webinar for non-profit leaders and executives of small to mid-sized charities and nonprofit organizations. The webinar is on April 5th at 1:00pm EDT.
This webinar will address the following topics:
- What the board and individual director’s roles are in financial governance
- How financial statements and reports can help directors fulfill those roles
- When you are required to have an audit or a review of your financial statements
- How to read and understand annual audited financial statements
- What financial reports your board should be receiving to monitor financial performance
- The roles of bookkeepers and internal and external accountants
- What you can do to improve financial understanding on your board
Join us for an hour to get an overview of this very important topic. It will help you become a better board member or senior staff person and it will help you protect the assets and reputation of your organization and its directors. Ultimately, learning more about reading and understanding financial statements will help you advance and protect the cause you are so passionate about.
Gordon Holley is the President and CEO of Humanity Financial Management Inc. As a CPA, CA for almost 25 years now, Gordon loves helping individuals and organizations that are trying to make the world a better place. In his role at Humanity Financial, Gordon sees the stress and anxiety produced by finances and financial reporting for many not-for-profit-organizations (NFPOs), charity board members, and senior staff.