The idea of explaining nonprofit financials in the space of a blog is somewhere between ambitious and absurd, better that’s never stopped us before. I like to say that nonprofit finance has just two jobs: to keep us out of jail and to allow us to make the best possible resource decisions. The first is simply everything we label “compliance,” but still nothing to sneeze at. Put another way, your finance team better have a thorough understanding and full respect for the guidelines, standards, and statutes that impact their work. If they don’t, the auditors will find out and your funders will take actions you won’t like. Making the best resource decisions though, requires a great deal more effort in communicating goals and establishing agreed-upon common language between finance staff and the mere mortals that run the organization. I don’t know about yours, but our finance team produces loads of separate reports each month each of which provides different information for different uses. Some of them are more interesting that others and there’s arguably a priority around which matter most depending upon your organization’s financial state. Here are some basics around what to ask for and review:
First on the list should be a “Surplus and Deficit Summary” or what was once called the income statement. You should reasonably expect your finance staff to provide you an updated one of these that is current through the end of the previous month. Current means based on actual revenues received and expenses spent, and not just guesses. This report has four major sections. Across the top are the revenues booked in each major program area or department through the end of the prior month. These numbers are all cumulative from the start of your fiscal year and represents money coming into your organization that the rules say can be counted. Beneath the revenues section, is a breakdown of expenses in whatever major expense categories you track. Typically, the largest expense is people so this might be on lines labeled staff salaries and benefits. Occupancy, which usually includes rent and expenses directly related to your space such as utilities and CAM charges, is probably your second biggest expenses after paying your staff. There are exceptions, of course, but it is not unusual for these two expense areas to make up as much as 75 percent of everything you spend. For that reason, when your organization finds itself running in the red and in need of cutting costs, it’s extremely difficult – short of a revenue windfall – to fix an ongoing deficit without changes to payroll and occupancy.
The third section, which is usually on just one line after expenses, is your indirect allocation. There’s often a great deal of confusion about what this “expense” is, why it’s there, and what should be included in it. For starters, having an indirect allocation – also referred to as admin, M&G, or overhead – is not a sign of bad behavior. Indirect expenses in any organization are a fact of life and a normal, healthy thing. Specifically, indirect expenses are those costs that are not clearly and directly attributable to specific programs. Examples might be your executive director’s pay, your IT infrastructure, rent for your headquarters, the cost of your independent audit, legal fees, proposal development, and the salaries of some or all of your executive team. If your organization does not have any of these things, you have bigger problems than reading financial statements! You should also NOT be throwing indirect charges directly into program expenses because it distorts your programs’ financial reality and can lead management to make suboptimal resource decisions. While there may be some who will disagree, I believe a healthy indirect number is between 10 and 20 percent of your revenues. Some private funders will insist on a 10 percent limit but there is strong evidence that forcing low rates leads organizations to under-invest in their infrastructure.
The last area of your Surplus and Deficit Summary is, guess what!, the surplus and deficit summary! For each major program or department, the bottom line should clearly show you whether the program is running a surplus or a deficit. If it isn’t obvious, this is revenues less expenses less the indirect allocation, cumulative since the beginning of the year. If there’s a significant surplus, you may be underspending and missing an opportunity to increase your impact. If your deficit alarms you, them start by a) looking at the largest expense categories, and b) considering what options you have for increasing revenues. Whatever you do though, don’t let it go and hope things fix themselves.