Client-Centered Financial Expertise

Introduction | What | Why

Your cash accounts are reconciled and you have the financial data from the accounting platform … what is the data telling you? It is important to interpret the data accurately using the correct tools to discern trends so that key data can be reported out to various stakeholders. Accurate analysis will lead to precise reporting which in turn will inform key decisions about strategy and mission and potentially save the organization a lot of resources in unexpected costs.

PFFE Approach

Accurate analysis of the financial data depends on thoroughness in the bookkeeping phase of the reporting cycle. Therefore, it is critical that the bookkeeper understands the operations so that revenue and expenses are coded correctly and consistently.

Analysis takes time and patience, and it gets easier with experience. The person reviewing the data from the accounting platform should have a clear grasp of operations as well as recent and upcoming events in order to be effective. The analyst will be able to predict the expected impact on the financial statements of recent events and understand the variances against the various benchmarks, such as the budget and prior year. An astute analyst also considers the financial results from the perspective of outcomes over the reporting period and makes connections between different areas of the nonprofit.

Analyzing the financial data can be done by examining time-series, where results are viewed monthly, quarterly, and sometimes even annually. Most accounting software will easily generate an Income Statement by Month, which is a quick way to find missing entries in the underlying bookkeeping.

A lot of complex data can be simplified through ratio analysis. For example, total cash can be represented with the “months of spending” metric, which scales with the size of the organization. This is an easy metric for most people to understand and can be presented in a line chart. The net income or savings indicator can be presented as a percentage and the trend can be compared to others in the same sector. 

A thorough analysis extends to data contained in payroll reports, fundraising reports, grant and reimbursement reports, as well as competitor results.

• Payroll reports can show departmental costs that may be too onerous to breakout in the accounting platform.
• Reconciling against the fundraising platform can flag unreported pledges or vice versa.
• Comparing against grant budgets and reports could flag double-dipping of expenses even before the expenses are incurred.
• Peer and competitor results can frame your own results and provide insights into potential operational efficiencies. This is also called “cross-sectional analysis”.

Leadsheet as an organizing tool

As part of the analysis phase, PFFE typically prepares a leadsheet that supports the final financial report. A leadsheet is essentially a spreadsheet workbook that contains the final reports as well as supporting workpapers and comments. Among the supporting workpapers, we suggest the following components:

• Export of the Statement of Financial Position from the accounting software
• Export of the Statement of Activities from the accounting software
• Accounts Receivable schedule
• Accounts Payables schedule
• Net assets schedule in a roll-forward format that clearly delineates purpose and time restrictions within the “with donor restrictions” net assets. Each reporting period should clearly indicate the increases and depletions in the period (remember that QuickBooks doesn’t track “With Donor Restrictions” net assets so it is important to have this external schedule).
• Other schedules that may support other entries on the Statement of Financial Position such as prepaid or accrued expenses, and the general ledger for the reporting period
• Prior period report that was sent to the client for quicker comparisons
• A fiscal year-end leadsheet, which may be more extensive since most accounts will need to be reconciled as part of the year-end and pre-audit procedures.

We recommend using tab colors or spacers to group the workpapers and enables quicker navigation. Additionally, you can use the Excel comments feature to add notes for the future and highlight specific numbers that may be key to a narrative that accompanies the financial statements. Notes that explain assumptions may feel time-consuming but remember that another reviewer may have limited context and information so what may seem obvious may not be so for others.

Frequency

PFFE suggests that this happens monthly immediately after the bookkeeping phase is complete. This is because the data and events are fresh in the minds of the team and it is easier to get reliable information to support the analysis.

Examples of Data Analysis

Conclusion

This is a key step in the process that can’t be rushed. Accuracy in the analysis can be the difference between mediocre performance for your nonprofit or excellence in its mission.

Introduction | What | Why

Financial reports communicate your results to stakeholders and is the result of the accretive process of bookkeeping and data analysis. The standard nonprofit financial reports include the following statements and are presented on an accrual basis:

• Statement of Financial Position
• Statement of Activities
• Statement of Functional Expenses
• Statement of Cash Flows (while this report has value, most readers may be more interested in forward-looking projections for cash)

A typical financial report generated by the accounting software presents the raw numbers and is usually not enough to communicate the key points. Some questions that might arise from an executive director or board members include:

• What do the numbers mean?
• Don’t we have a finance committee that takes care of all this?
• Why do these statements look different from the for-profit statements I am used to? 
• Why are the numbers different from budget and the prior year?
• What is the difference between restricted and unrestricted net assets?

Stakeholders use these statements to understand the effectiveness of all aspects of the operations and consequently the raison d’etre of the nonprofit: the effective delivery of the mission. 

PFFE Approach

Content of the Report

It is quick and cost-effective to generate standard reports from the accounting platform and email them directly to the leadership team. However, it is important to consider the skills of the reader. Does the reader have enough knowledge to interpret the variances on their own or would notes help? Does the reader understand the key ratios that are markers for stability and success or do these need to be explained? PFFE will typically add notes to the financial statements to explain the key variances.

It is important to provide forward-looking guidance. While the senior management team may have an intuitive grasp of the near-term outlook, board members may not. A common report is a cash flow projection that looks forward at least six months. It presents the following on a monthly basis:

• beginning cash
• cash receipts
• cash disbursements
• ending cash 

This report can take some time to prepare since it requires best guesses as to timing of receipts and disbursements. Seeking input from the executive director, fundraising department, grant writers and program staff is important to make this a reasonably accurate report. Avoiding a cash crunch is key and this could spur the team to reach out to partners to collect on invoices, delay larger expenses to match the timing of receivables, and generally operate in a more sustainable way. This may also highlight the need for a line of credit or a rainy-day fund to provide working capital for the operations.

Finally, strong communication skills are important to achieve excellence in this function. This comes through practice and having clarity about what the messages are.

Presenting the Report

Presentation requires a lot of thought because a report full of numbers may just cause the reader’s eyes to glaze over. The audience for the reports may vary in skill and the same reports may be presented to different audiences. Some strategies for presentation include:

• Consider grouping categories to adapt to the audience. For example, the full board may only care to see results at a high-level while the executive director may want to see each category. The detailed notes shared with the board may not be the same notes that the organization wants the grantor to see.
• Format the report so that it is printable on a letter size page and judge whether the report is more readable in portrait or landscape format.
• If the report is a spreadsheet, remember to repeat headers if the report is breaking over multiple pages. Does the page break point make sense?
• With permission, add the organization’s logo to the report to create a sense of ownership of the data among the executive director and board.
• If there isn’t a narrative, a simple dashboard with the key metrics may help convey a summary of the results.
  Use charts to convey trends in a visual way. For example, if revenue diversification was a focus, a bar graph could show the ratios between the revenue streams as well as how they have evolved over time. 

PFFE always invites teams to discuss the results, even if it’s just over a 30-minute call. Engaging the leadership team in the reviews helps build trust in the data and a relationship with the presenter. Consistent reviews will ensure accountability for all parties and increased transparency between the finance team and the leadership team.

Frequency of the Reports

This should be tailored to the size of the organization, budget, and internal capacity. A good guide is the frequency of the board meetings, which would drive the full reporting package. However, the underlying work should be done monthly.

Organization Tip

Finally, organize your reports folder so that the final version of the report is clearly identified. Consider whether any internal notes and comments need to be removed from the final version.

Examples of Financial Presentation

Conclusion

Effective communication is essential so that key decision makers have the facts they need. Thoughtful and detailed analysis can get lost if it isn’t presented in an equally thoughtful and clear manner.

Introduction | What | Why

The budget is a plan that indicates management’s objectives and how it will secure, use, and pay for resources to meet these objectives. The budget is also a communication tool that articulates the organization’s ambitions and with adequate thought, aligns with the vision. Most grantors want to understand the organizational budget as part of their due diligence, so what is your budget communicating and how does it align with your mission? How well does it align with the organization’s long range and strategic plans?

The needs that a typical nonprofit seeks to address exceed the resources available. The budgeting exercise is a strategic process that requires nonprofit leaders to prioritize limited resources. Among the issues they must decide upon include: Whether to invest in scaling  programs or saving to build a “rainy- day fund”.?

• Determining the impact of increasing wages on their program cost structure and what to charge to do so.
• Assessing how the changing competitive landscape affects future operations.

Questions that are typically addressed in the budgeting exercise include:

• What is the organization trying to achieve?
• Why does it want to achieve that goal?
• How does it intend to translate the goal into results?

The budget will include an operating budget that usually presents the plan for revenue and expenses on an accrual basis. The cash budget projects cash flow through the year and the capital budget plans for large expenditures. A larger organization may choose to build a financial model to inform the budget.

PFFE Approach

An effective budget draws data from all areas of the organization and requires a thorough understanding of the operations and variables that drive the economics of the organization.

For PFFE, the budgeting process includes the following steps:

• Preparation—This phase involves the executive director and managers. It is sometimes accompanied by a guidance memorandum from the CFO and an expected timeline
• Review and Revisions – This process helps find the balance between various strategies to meet competing goals.
• Presentation and Adoption – This typically takes place at a board meeting before the start of the fiscal year.
• Implementation – This involves the dissemination and execution of the budget by the management team
• Evaluation – This occurs through periodic financial reporting.

We believe it is important for an organization to set measurable goals for itself. Spending as little as possible is not specific as opposed to reduce spending by x%. Goals can be demanding but ultimately have to be realistic if you aim to get the team’s buy-in. Therefore, trusting relationships between the finance team and managers are key to an effective budgeting process. PFFE works with a nonprofit’s executive director and managers to examine line-item expenditures as well as responsibility centers as a whole to establish the goals.

PFFE can also build a financial model to present different scenarios—with the ability to tweak drivers—to the executive director and managers. To increase transparency, we clearly lay out assumptions in each scenario and include a narrative to make the budget more accessible to the board.

Long-range planning is a logical next step in the process. Even a simple projection for the next two to five years using straight-line assumptions can bring to light weaknesses that may not be visible in the budget for the upcoming year. This approach gives the reader a sense that the management team isn’t jonly focused on the goals for a single year but sees it as a step in the longer journey towards mission delivery.

Examples of Budgeting

Conclusion

The budget is not an exercise in predicting the future but a valuable opportunity to deeply examine all aspects of the organization with the goal of achieving its goals. PFFE can be a partner in this process.