Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)
I admit it. My desk is a mess right now. It’s covered with papers, books, a few magazines with good articles in them and one organized rack of file folders. I don’t like the disarray, but at least I know where everything is. It’s all out in the open. Later, I’ll spend some time putting things away. For now, I’d rather spend time communicating with you about nonprofits.
You know, I could clean off my desk really quickly if I just stacked up everything into one straight, even stack of papers. I could even put the stack under my desk! A quick wipe with a dust cloth, and my desk would be clean. But, would I know what was in that stack? I might even forget the stack was there.
Financial statements are like that. As a nonprofit leader, you probably review financial statements often. By the time it gets to you, the statement of activities (P&L or income statement) is probably pretty clean. You may not see many variances from budget or prior year. But what do you know about how it got that way? Did someone sort through everything and put it in its place, or are things just stacked up where they won’t be seen?
You know that, generally, when you spend money, the payments end up as expenses on the income statement. You can see the expenses, compare them to last year’s and focus on the variances. It’s all out in the open. But, you know you can spend money and it won’t hit the expense section at all. Why? Because expenditures can be parked on the balance sheet in asset or liability accounts, and not even show up on your P&L. Whether payments get stacked up in balance sheet accounts accidentally or on purpose, you’re not likely to see them unless you review a comparative balance sheet and ask questions.
Payments for property and equipment get added to balance sheet accounts all the time. That’s where you expect them to be. You’re familiar with balance sheet accounts like property, cash, and investments. But what about the other balance sheet accounts? If they changed from last time, that means something was added. If it’s big enough, you should ask for an explanation for the variance.
What if you saw a balance sheet line item called “receivable from affiliate”? That might mean you paid out money for that other organization you manage and they haven’t paid you back yet. Why? Good question.
What if you saw a balance sheet line item called “payroll taxes payable”, presented as a negative number? I doubt it’s a payroll tax receivable. Maybe payroll-related payments ended up on the balance sheet when they should have been called expense instead. Your net income would look awesome—until you followed up and found the misposting.
What if you saw a balance sheet item called “Suspense”? That accountant-speak for that stack of papers under the desk. Eventually, each payment needs to be taken out, and put where it belongs.
What can we learn?
Insist on seeing a comparative balance sheet. Next time you review financial statements, look at each account and ask yourself “what is it?” If you can’t tell, ask for an explanation. Then look at each account and consider why it has changed since last time. If you can’t tell, ask for an explanation. These are not dumb questions, and your staff may have to do some research to get the answer for you. Make sure you get a good answer.
Find out more about financial statements at our seminar session, The Power of Financial Reporting—making your finance function work for you, and find out more about making financial statements accurate at the Controllership and the Layer Cake of Finance session of our 2-day live seminar, 501(c)(fit!) Financial Intensive Training for the Nonprofit Executive coming up very soon.
I like my messy desk better now, although I’ll still be straightening it out soon. Think of my desk the next time you receive some financial statements to review. Make sure you find out what’s been stacked on the balance sheet and don’t be reluctant to ask what’s under the desk.
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