Financial Statements Without Fear

Every director needs enough financial literacy to ask good questions. The treasurer and finance committee deepen the work; they do not carry the duty for everyone ¹.

Five reports, five questions

Statement of financial position

A balance-sheet snapshot:

assets = liabilities + net assets

Read:

• cash/cash equivalents: how much exists now;
• receivables/pledges/grants: expected collection and risk;
• prepaids: value paid in advance, not cash;
• property/equipment: accounting value, not necessarily sale or replacement value;
• payables/accruals: bills/services owed;
• deferred revenue: cash received before earning it;
• debt: principal, terms, covenants, current portion;
• net assets without donor restrictions;
• net assets with donor restrictions.

Board question: What can we actually use, and what obligations attach?

Statement of activities

Shows revenue, expense, releases of restrictions, and change in net assets over a period.

Board question: Did the operating and restricted story perform as intended?

Do not read total change alone. A capital gift can produce a large surplus while recurring operations deteriorate.

Cash-flow statement/forecast

Accounting statement classifies operating, investing, and financing cash. A management cash forecast shows timing forward.

Board question: When could cash run short, even if the annual budget balances?

For a seasonal arts program, a rolling 13-week forecast can expose registration deposits, instructor payments, event costs, payroll, grant reimbursements, and repairs.

Budget-to-actual

Shows plan, actual, variance, revised forecast, and explanation.

Calculate:

dollar variance = actual − budget
percentage variance = (actual − budget) / budget

Use sign conventions carefully: an expense above budget is operationally unfavorable even if shown as a positive arithmetic variance.

Board question: Is the variance timing, permanent, restricted, or a changed assumption—and what action follows?

Restrictions and grant schedule

Track beginning balance, new restricted revenue, qualified spending/releases, ending balance, cash location, grant period, reporting dates, match, and obligations.

Board question: Can we prove each restricted dollar was used for its purpose and are we financing any reimbursement gap?

Cash is not revenue; revenue is not margin

Examples:

• A donor pays $50,000 restricted to a future roof: cash rises now; current operating availability does not.
• A participant pays a deposit for next year: cash rises; some may be deferred revenue.
• A reimbursement grant covers costs after proof: revenue recognition and cash receipt may differ.
• Depreciation reduces reported results without current cash outflow, while roof replacement requires future cash not captured by current depreciation.
• An in-kind contribution may be reported as revenue and expense but creates no cash.

Ask for a bridge:

reported change in net assets → noncash/timing items → restrictions → working-capital changes → actual unrestricted cash movement

Functional versus natural expense

Natural classification says what was bought: wages, occupancy, supplies, insurance, professional fees, depreciation.

Functional classification says why: program services, management/general, fundraising.

Allocation is judgment. The board should understand methodology and consistency, but should not equate low administration with virtue. Finance, HR, IT, safety, data, development, and maintenance make mission possible. Underinvesting can create hidden liability.

Board packet format

Monthly or quarterly:

1. one-page finance dashboard;
2. statement of financial position with comparison;
3. activities versus budget and prior year;
4. forecast to year-end;
5. 13-week cash forecast when useful;
6. restrictions/grants schedule;
7. fundraising and program revenue detail;
8. capital/debt/reserve schedule;
9. written variance/risk narrative;
10. decisions requested.

Use consistent definitions and dates. Label preliminary numbers.

Ten questions

1. How many days of available unrestricted cash do we have?
2. What receipts/payments create the next low point?
3. Which revenue is one-time, restricted, uncertain, or concentrated?
4. Which costs are fixed, variable, deferrable, or already committed?
5. Are payroll taxes, debt, restricted obligations, and payables current?
6. Which variances change the full-year forecast?
7. What maintenance/capital need is absent from the operating result?
8. Are receivables and pledges aging?
9. Do program economics include staff and facility load?
10. What decision or threshold requires the board?

Practice

Suppose:

• cash: $220,000;
• donor-restricted cash: $90,000;
• board-designated reserve: $60,000;
• minimum operating cash: $40,000;
• average monthly cash expenses: $45,000.

One useful conservative availability view:

$220,000 − $90,000 − $60,000 − $40,000 = $30,000 above protected categories

Unrestricted cash days before minimum, if all designations remain intact:

($220,000 − $90,000 − $60,000 − $40,000) / ($45,000 / 30) = 20 days

But confirm whether restricted funds are held separately, whether reserve can be undesignated by the board, what liabilities fall due, and whether average expense hides a seasonal spike. The formula starts inquiry; it does not finish it.

Financial literacy means translating numbers into mission choices without pretending numbers are the choices.