Routine maintenance helps you get the most mileage out of your vehicle, and as the vehicle that represents your not-for-profit’s financial position, your financial statements may need periodic tune-ups. Reviewing your financial statements for ways to improve them helps ensure they accurately reflect your organization to the public, your board and current and potential donors.
There are a number of ways you can better the preparation and presentation of your financials, and we’ve gathered a short list of four best practices and tips you may find useful. Whether or not you implement the best practices outlined below, keep in mind that small improvements and maintenance to your financial statements can be a rewarding way to bring value to your organization.
A review of other organizations’ financial statements is a great place to start when updating your own. Spend some time examining peer organizations’ financial statements and look for best practices you can implement and incorporate. The AICPA also produces guides and tools to assist in identifying best practices in financial statement presentation and disclosures.
Though it may seem like a minor detail, the format of your financial statements is critical to the ease with which they’re consumed and used. Some organizations use a multi-column statement of financial position (balance sheet) while others prefer a single column; however, we have found that most organizations use a single column approach. This approach has emerged largely to serve the needs of board members who commonly view a commercial company's financials in this format.
While this seems to be the best choice for most organizations, many of you may have had conversations with bankers and others who like to drill down into the liquidity position of the entity. In the case of the statement of activities (income statement), we have found that organizations overwhelmingly use a multi-column approach. Some organizations also use a "stack" approach where the changes in unrestricted, temporarily restricted and permanently restricted net asset classes are literally placed below each of the other categories. Though less common, this format might be worth considering in determining whether there are any compelling reasons for a change.
Yet another area of flexibility is in the use of an operating/non-operating presentation within your statement of activities. Many organizations already use this with great results. This approach is more common among organizations with endowments; however, that is not the only item you can present in the non-operating section. Bequests, capital campaign activities (both revenues and expenses), non-recurring items such as gains or losses from asset sales or retirements and a host of other items can be reflected in the non-operating section. If organizations choose this presentation, they must disclose within the footnotes what they put in the operating/non-operating sections — a small price to pay if this helps create transparency on the financials.
On that note, examining your footnotes can be a simple way to update your financial statements and ensure readability and transparency. A number of areas within your footnotes should be examined for improvement:
- Language: Sometimes historical information may not be as important for the years the financial statement is being presented. Review your footnotes for terminology that refers to a timeframe older than the past two years and reword or remove any information that is no longer relevant to the financials being presented.
- Sequencing and Order: New disclosures are often added to the end of your disclosures. Compare the order and flow of your core financial statements to your footnotes and ensure that your footnotes follow a consistent and logical flow of sequence. Do the same for the order of your organizational policy note and adjust it accordingly.
- Duplication: Common areas where duplication of information occurs include fair value, investments, endowments and net assets disclosures. Review these areas, and if there is duplication, determine where the information is best presented.
- Investments and Net Assets: A best practice in disclosures of investments and net assets is a "roll forward" approach. In the case of investments, such a roll forward can clarify how much new money came into the organization, how much was investment return and how much was withdrawn for operations. These numbers have long been disclosed, but they have not often been disclosed in this manner, which led to questions from board members and more work for the financial statement users to understand the data.
We have seen a similar "roll forward" approach to temporarily and permanently restricted net assets. Such a table would show new contributions by restriction type, use of funds, and income added due to investment returns that are not always clear in most financials.
- Organizational Description Disclosure: Review your current disclosure to determine if it accurately reflects what your organization currently does. Compare the list you have disclosed to your organization’s current activities and update the organizational description disclosure to reflect the current locations of the operations, programmatic activity and major sources of revenue.
It is also a best practice to review the 990 for any additional information that could be relevant to disclose in the financial statements.
- Revenue Recognition Policy: Revenue sources may grow and become more material to your organization, so you should periodically review your revenue recognition policy for accuracy and completeness. Review each significant revenue line item on the statement of activities and compare it to the corresponding revenue recognition policy disclosure to determine if the existing disclosure is adequately describing the current activity. Add in any additional information necessary to your policy disclosures.
- Financial Statement Caption Policies: Double check that the significant line items on your financial statements align with their corresponding policy disclosures and add any missing disclosures.
- Related Party Disclosures: These disclosures should be reviewed and updated to help clarify the interrelationships of the organization. Make sure you adequately describe the nature of related party relationships and disclose the transaction activities during the year. Be sure to include the balances due to/from (receivables and payables) in the disclosures.
Small changes, big difference
Simple changes to the way you present and prepare your financial statements can make a big difference in your organization’s financial transparency and thus the confidence your donors, funders, and bankers have in your financial position.
For further guidance on how to improve your financial statements, contact your CBIZ Tofias & Mayer Hoffman McCann Not-For-Profit & Education advisor here.