Activities in yearly accounting cycle:

Financial Management of Programs, Assets, Inventory, etc.

Managing Program Finances

Usually, there are two major types of costs to consider: indirect costs and direct costs. Indirect costs are what we sometimes call “administrative” or “overhead” costs, for example, costs to run certain facility. Direct costs are those that fund resources which directly produce services to clients, for example, supplies and materials for books provided to clients. Usually, the lower your administrative costs, the more it looks like your resources are going directly to services to clients. In addition, you may have restricted grants (that is, grants that are dedicated for certain programs), which require you to report monies spent on overhead and directly on the program. Therefore, it’s wise to track carefully how much money each of your programs requires to operate and how much revenue it generates, as well.

Financial Statements and Analysis

In order to know how your nonprofit is doing, you’ll do some ongoing financial planning and analysis. In this planning and analysis, you’ll likely use your bookkeeping information to produce various financial statements, including a cash flow statement, statement of activities and a statement of financial position.

Cash Flow Statement (or Statement of Cash Flow)

The cash flow statement depicts changes in your cash during a specific period.

Statement of Activities (Income Statements )

These statements include how much money you’ve earned (your revenue) and subtracts how much you’ve spent (your expenses), resulting in the total of your unrestricted net assets. The statement of activities includes how much money you’ve earned (your revenue) and subtracts how much you’ve spent (your expenses), resulting in how much you’ve made money (your profits) or lost money (your deficits). Basically, the statement includes total sales minus total expenses. It presents the nature of your overall profit and loss over a period of time. Therefore, the Income Statement give you a sense for how well the nonprofit is operating.

Statement of Financial Position (Balance Sheets)

Whereas the statement of activities depicts the overall status of your profits (or deficits) by looking at income and expenses over a period of time, the balance sheet depicts the overall status of your finances at a fixed point of time. It totals all your assets and subtracts all your liabilities to compute your overall net worth (or net loss).

Financial Analysis (individual statements, ratios, break-even analysis, etc.)

Financial analysis can tell you a lot about how your nonprofit is doing. Without this analysis, you may end up staring at a bunch of numbers on budgets, cash flow projections and financial statements. You should set aside at least a few hours every month to do financial analysis. Analysis includes cash flow analysis and budget deviation analysis. Analysis also includes balance sheet analysis and state of activities analysis. There are some techniques and tools to help in financial analysis, for example, profit analysis, break-even analysis and ratios analysis that can substantially help to simplify and streamline financial analysis.

Ratios

There are a variety of ratios that can be used to help determine the current and future condition of a nonprofit. The ratios are produced from numbers on the financial statements. The usefulness of ratios often are from comparing ratios from different time periods in the same nonprofit or from standards for a type of nonprofit, e.g., social services, associations, civic organizations, etc.