Non-profit leaders devote a lot of time and effort in ensuring we use the right words to convey information: We work hard on establishing job descriptions and performance measures for our staff; we toil over communication pieces to ensure our constituents understand how we make their lives better; we involve lawyers to refine our agreements with our partners to eliminate any ambiguity of each organization’s role; and we invest in case statements and collateral to ensure our donors understand how our work makes the world a better place.
All of this is exactly how it should be because getting the right information to the right people has a critical impact on being successful.
Yet how many of us outlay the same energy in our financial statements and the information they convey?
The truth is numbers intimidate a vast majority of people. They feel foreign and uncomfortable and so we create an over reliance on specialists to figure them out for us. We are grateful (at least most of us) for our auditors who help us prepare our financial statements. They ask us questions about this invoice or that receivable, but how many of us can anticipate how each decision will impact the financial statements and the story they tell?
But relying on others without understanding what they are doing decreases our effectiveness as leaders.
Imagine you were going to set up a major part of your organization in China or Mexico. Would you not invest the time to learn Chinese or Spanish? Wouldn’t you want to understand the local customs in order to maximize your ability to set up your foreign operations?
Numbers are a language like any other, and, in that spirit, it is critical non-profit leaders learn this language.
If the goal of being better leaders wasn’t incentive enough, changes in the non-profit landscape is making this a necessity. Philanthropists are now talking in this language. They ask questions about net assets, sustainability and return on investment. How many of us are able to help a donor understand why the overhead ratio is a misleading myth, in terms they will understand?
Given the central nature of the financials to our success, it is incumbent upon every non-profit leader to not only learn how to read these statements, but to truly understand the underlying logic of how these reports are built.
While the Statement of Financial Position, Statement of Activities, and Statement of Cash Flow have fancy and intimidating names, they are backed by straight forward concepts that represent tangible actions in the world. The Statement of Financial Position, better known as the Balance Sheet, gives a snapshot of the financial value of the organization by reflecting what the organization owns and what it owes.
The Statement of Activities, better known as the Profit and Loss Statement, demonstrates progress over time in reaching our financial goals by reflecting what we’ve earned and what we’ve spent. The Statement of Cash Flow helps us see how much cash is available at any given time and where it is going next. Together, these financial reports provide three points in space to triangulate the financial health of the organization.
Constituents want to know you’re going to be around when they need you; staff want to know if are contributing to the success of the organization; and donors want to know that your organization is a sound investment. By understanding the financial statements, you will guarantee that you are making the right decisions and ensuring the results are accurately communicated to the right people.
This blog was written by Academy for Nonprofit Excellence Instructor, Leon Seemann, CFRE.