In terms of financials, the Board of Directors should be getting two statements and only two, for a very good reason. Each month your board should get a balance sheet. A balance sheet is a financial statement at A POINT IN TIME. Typically this point in time is at the end of the month, end of quarter or end of the year or even the month prior of any board of directors meeting (for example an annual meeting that takes place in February should have a January balance sheet). A balance sheet tells your board just exactly how much money and assets the organization has at that particular moment when the balance sheet was run. A balance sheet will show the value of the building (if you own it, the money in your checking account, the value of furniture, fixtures and land (owned) accounts receivable (what people owe the organization), accumulated depreciation, the value of any investments the association holds (such as CD’s or stock), any money the organization owes at that point in time such as taxes, mortgage, notes, loans, accrued payroll and accounts payable (bills that need to be paid). The assets plus the liabilities equals owner’s equity- its called the accounting equation A+L=OE. Basically it means all that you have less all that you owe equals your actual financial position. The board should use the balance sheet to track investment performance comparing the current balance sheet to the prior balance sheet. The board should know that the organization has enough assets to cover its debts.
The second sheet is called an income statement or for non-profits a statement of activities. This is commonly referred to as a profit and loss statement. This is also at a point in time, usually the end of the month, quarter and year. This statement should show what you earned (income) and what you spent (expenses) for the current period, the year to date period (YTD), the budgeted YTD and the annual budget for each account listed. This statement will not show capital expenditures as they are tracked in the balance sheet. Why in a just a moment. This financial record allows the board to see its financial performance. The board has a duty of care, a fiduciary duty, to ensure money is spent wisely and in accordance to the plan (the budget) they set for the year.
I have seen association executives give out checkbook registers and even copies of cancelled checks as part of their financials . Here is the danger in doing this:
1) Boards are to have oversight responsibilities not administrative responsibilities- force your board to look at the big picture because that is what is important in achieving the strategic plan- what is not important is how much the birthday cake cost and what bakery you used.
2) If you allow your board to focus on the minutia of daily check writing that is where they will stay focused. Looking at the big picture and abstract thinking is hard. Most people do not do this in their own lives; people will naturally gravitate to an item they can understand and comprehend.
3) Focusing on the minutia almost always results in a board that is watching pennies while dollars fly out the window. I have seen this over and over and over with my peers, especially in smaller organizations. The board will question a two dollar increase in soda purchases and why are we still using Sam’s Club would Costco be cheaper. This can lead to a 20 minute discussion on the merits of soda at meetings, requesting the staff do a pricing check of at least three stores before purchase etc. to maybe save, maybe that week only, $2. Meanwhile the check for $108,000 for the forms license goes unquestioned because many just can’t wrap their minds around such a large check. Its the same as it was last year, its on budget, so no one questions it. By giving the board the income statement which condenses operations into activity centers you train your board to look at the financials in context. Rather than focusing on a $24 soda purchase, they instead can see the total of what technology is costing them and what percentage of the budget it consumes, and question its relevance to the mission.
Finally, something that seems to throw a lot of volunteer boards is capital expenditures. Why when we wrote out a check for a $2500 desk is it not showing in the income statement (P&L). In the world of accounting, an asset is an asset is an asset. In the accounting dimension, there is no difference between a $2500 in cash, in a CD, or in a piece of furniture. Any asset can be liquidated to cash by being sold or cashed in or withdrawn. In the accounting mind, its all cash or a cash equivalent so when you purchase a capital asset you are not depleting or decreasing the association’s worth. You are merely replacing one cash equivalent with another- there is no change in the association’s net worth and that is why it does not go on the income statement and another reason why you should always provide your board with a balance sheet.
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