Understanding Financial Statements Prepared for Delaware Valley Grantmakers 11/2011 Katherine Reilly, CMA

Introduction Why read financial reports? What do they tell you? Should they receive a grant? Would you want to be on the Board?

Agenda Financial Reports Statement of Financial Position Statement of Financial Activity Statement of Cashflow Statement of Functional Expenditure Ratios Audits vs 990 Operating Reserve

Types of Financial Reports Statement of Financial Position Balance Sheet - Snapshot Statement of Financial Activity Income Statement – Period of time Statement of Cashflow Cash Statement of Functional Expenditure Uses of the income by program, fundraising, management.

Types of Financial Systems Cash Based –Income recorded when received –Expenses recorded when received –Advantages & disadvantage s Accrual Based –Income recorded when notified –Expenses recorded when bill is received –Advantages & disadvantages Modified Accrual

Statement of Financial Position Assets – What you own Liabilities – What you owe Net Assets-What you own minus what you owe Unrestricted – No donor imposed restrictions Designated – Board determines use Temporarily Restricted – Restricted as to time and/or purpose Permanently Restricted – Only interest or income can be used Assets = Liabilities + Net Assets

Statement of Financial Activity Income – Contributions that arrive or is owed you Contributions – Money, some in-kind contributions Use of temporarily restricted funds Accounts Receivable = Income Expenses – Outflow Accounts Payable = Expenses Net Income – Income minus expenses

Statement of Financial Activity

% Change Contributions $ 245,000 $ 500, % Fund raising events 115, , % Contribution-space 120,000 0% Fee for Service $ 10,200,000 $ 8,400,000 21% Governmental Contracts 4,400,000 3,400,000 29% Grants 650,000 0% Other 170, ,000 13% Interest 5,000 7, % 15,905,000 13,377,50019% Income 2009 & 2010

Expenses EXPENSES % change Program services 13,830,000 10,700,000 29% Fund raising 280, ,000 47% Management and general 2,680,000 2,750,000 -3% Total expenses 16,790,000 13,640,000 23%

Why do you need a balance sheet & an income statement Balance sheet Cash position Types of assets Amount of liabilities Net assets – Unrestricted vs restricted Income Statement Current income – type and amount Current expenses – type and amount This year compared to last year and to budget

Linking Statements

Statement of Financial Position

Statement of Financial Activity

TrendsTrends Total % Change Support and Revenue Grants 314, ,7957% Contracts 1,000,000 0% Contributions 554, ,5238% Board Support 272, ,6577% Fee income 1,035, ,00232% Investment income 2,232,995 2,364,298-6% Total Support and Revenue 5,410,031 5,211,2754% Expenses Salaries & Benefits 2,427,129 2,290,4876% Training & travel 71,849 56,67327% Volunter expenses 82,317 69,29219% Event costs 1,639,393 1,735,118-6% Contracted Services 632, ,89747% Communications 198, ,635-13% Rent 219, ,68535% Insurance 34,581 38,752-11% Repairs & Maintenance 201, ,1385% Depreciation 147, ,447-9% Miscellaneous 25,452 32,008-20% 5,679,733 5,397,1325% Bequest 6,639,659

Income Trends

Expense Trends

Cashflow Statement

Statement of Functional Expenditures

Project budget

Types of Reports Prepared by CPA firms Audit – Highest form of reliability, detailed analysis & transaction testing (on a sample basis), provides assurance that the statements present fairly the financial position Review – Limited to an analytical review with no detailed transaction testing, variation analysis performed to compare current year with prior years for reasonableness, provides limited assurance about the financial position Compilation – Involves converting raw financial information into a readable format, no opinion is expressed

Independent Auditors Report To the Board of Directors of the Hope Agency We have audited the accompanying consolidated statement of financial position of Social Service Agency as of June 30, 2006, and the related consolidated statements of activities, functional expenses, and cash flows for the year then ended. These financial statements are the responsibility of the Organization's management. Our responsibility is to express an opinion on these financial statements based on our audit. The prior-year summarized comparative information has been derived from the Organization's 2005 financial statements and, in our report dated October 25, 2005, we expressed an unqualified opinion on those financial statements. We conducted our audit in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Social Service Agency and Affiliates at June 30, 2006, and the changes in their net assets and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Your Friendly Audit Firm Philadelphia, Pennsylvania October 27, 2006

Internal Controls –Auditor must evaluate control deficiencies and determine if they are significant deficiencies or material weaknesses Preparation of reports –Auditor will determine if the client is capable of preparing the financial statements and if the client has the skills and competencies necessary to prevent, detect, and correct a material misstatement Other matters Management Letters

Audit & 990

Financial Ratios Quick ratio – Cash divided by payables. Is it 1 or greater? Current ratio –Current Assets divided by Current Liabilities Is it 1 or greater? Debt to Equity -Long term debt divided by total net assets Is it less than.50? Increase in net assets (Current year’s net assets minus prior year’s net assets )divided by prior year’s net assets Is it greater than the rate of inflation? Fixed Ratio - Fixed Assets divided by total assets. The lower the number the more liquid the assets Overhead cost -Management & fundraising costs divided by total expenses Is it less than.30? (Could vary depending on type)

Operating Reserve Information Operating Reserve Policy Toolkit for Nonprofit Organizations (September 2010 Sponsored by the National Center for Charitable Statistics, Center on Nonprofits and Philanthropy at the Urban Institute and United Way Worldwide ( Why does an organization need an operating reserve? Unexpected shortfall in revenue Unexpected demands on your resources Unanticipated opportunities Less than perfect judgment and foresight A change in direction that is needed Day to day fluctuations in income and expense Seasonal fluctuations

Board Designated Operating Reserves Board designated operating reserves are that portion of unrestricted net assets that the Board establishes for the organization to use in case of an emergency or an unexpected event. According to the Nonprofit Operating Reserves Initiative Working Group the minimum operating reserve ratio should be 25% or three months of the annual expense budget.) Funding the operating reserve – the funds must come from unrestricted income and need to represent cash that is set aside. One method is to “fund depreciation”, another is to set aside a certain amount each year.

Questions