Show Me the Money

Here’s another exciting edition of Delegate Duties!  Get your coffee and No Doze ready, because this one involves accounting!  Yay!

Many volunteers express frustration about their council’s finances.  They do not know where to turn or how to translate what they’re being told at annual meetings and what that really means.  They also might wonder where the money is going.  So how do you find these things out?  There are a couple of ways. 

Hopefully, your council provides balance sheets.  If they do, that’s great, because that shows they are dedicated to transparency.  If they don’t, then ask for them.  Most likely they also use a third party auditor, so audits are usually available upon request as well.  Some councils even post these things directly on their website, which is even better.

What do I do with the balance sheets?  If you took basic accounting or studied it somewhere in your past, then you’re ahead of the game.  If you didn’t, then you’ll have to do some studying.  Sorry.  But if you really want to know what is up with your council, then it’s going to take some dedication, research, and self education.  I did a quick Google search and found this guide on accounting basics.  Here’s a very good one that’s specific to nonprofits.  There’s probably an Accounting for Dummies guide out there that will be helpful too as a starting point.  I’m not suggesting you go out and get a degree in accounting by any means, but you should have a understanding about the basics like the differences including assets & liabilities and revenue & expenses. It’s very easy to misunderstand what your council is reporting if you don’t have the basics down.  I’m not going to go into detail about these things, but I will make reference to websites that will explain it much better than I could.  I highly suggest reading those references first if you aren’t already familiar with them.  I am just going to cover the highlights of what you as a volunteer would probably want to educate yourself on when it comes to your council’s finances, and then it’s up to you to take it further after that point if there is something that catches your attention.

When I say the “balance sheets,” I’m actually referring to two different documents – the actual balance sheet and income statement.  Stop and read this reference this quick overview about them if you are unfamiliar about what they entail.

A balance sheet (also called the statement of financial position) basically gives you a snapshot of where a nonprofit stands financially and how well they could deal with their obligations at that point in time.  Some of the things you should make note of are assets and liabilities.  This very brief overview from Investopedia explains the basic types of assets and liabilities and about equity and also how to read a balance sheet.

If you have questions about specifics (like how much was spent on interest, occupancy/rent, etc), then you can see those things broken out in the income statement.  Revenue and expenses are highlighted in this document which give you an idea of what is earned and spent on the operational side of the council.  When you hear about a council “running in the red or black,” this is where you can see what that means.  Keep in mind nonprofits are different from businesses, so councils don’t earn profits.  They run either a surplus, where more revenue is coming in than expenses, or a deficit, which is vice versa.  A council being “in the red” for one year is not a cause for panic – but if you see it year after year, then that’s not sustainable, and questions should be raised as to why this is happening.

If your council still won’t give you balance sheets or give you grief about it, then something is wrong to be flat out honest and you should question its transparency.  But there’s another way to go about it, and that’s via the IRS Form 990.

What is a 990?  501(c)(3)s are required to file one with the IRS (with some exceptions).  It’s a very lengthy tax form that breaks out a nonprofit’s finances.  If you plan on printing it out, have a new black ink cartridge ready.

How do I find my council’s 990s?  GuideStar.org has the past four years on file.  CharityNavigator.org also might have a few more on record too, and you might find even more via Google searches.  Accounts are free on GuideStar and Charity Navigator, so don’t be shy.  Create an account and bookmark your council’s page.  If you purchase a subscription, you can download a report with more information, but it’s not necessary because it’s information that you can get from other sources for free or it’s already included in the 990s.  Plus the subscription is expensive.

A 990 gives you the same information as the balance sheets for the most part.  But the issue with them is that they usually aren’t released until almost a year after the financial year ends, so you’re going to have old data.  But, they are helpful if you’re tracking money through the years or looking for trends.

Some 990 links:

• 990 Glossary – a quick guide from GuideStar that’s a helpful resource.
• How to Assess Nonprofit Financial Performance – this paper is from 2001, so it’s a little dated, but it still does a good job walking through a 990 form and how nonprofits’ financials differ from for-profit companies.
• How to Read the New IRS Form 990 – a VERY thorough explanation of the 990 form, but it’s broken up into chapters which should help if there’s something you’re looking for in particular.

One thing that’s broken out in 990s that’s not necessarily the case in council provided balance sheets is fundraising expenses.  This is a very important factor to find out how efficient a nonprofit is when it comes to raising money.  While fundraising expenses in and of itself is not bad, if there’s an excessive amount, then questions should be raised.  If there are high professional fundraising fees, then that might be a red flag as well.

So what do I do with this information when I get it?  Everybody’s got different opinions when it comes to evaluating nonprofits, but according to Charity Navigator, there are three things to look at when evaluating a nonprofit.  The financial health of the organization (which you can find via balance sheets and 990s), accountability and transparency (how easily you can get this information), and the results (which you can judge for yourself as a volunteer).  For more specifics about these three topics, definitely read through Charity Navigator’s explanation that I linked earlier in this paragraph.

If you like to crunch numbers, then Charity Navigator also provides some formulas to determine financial efficiency.  The great thing about this article is that it tells you where you can find the amounts in the 990 (and even what specific line to look at!).

There are no hard-and-fast rules when it comes to nonprofit finances.  Personally, I think it’s more important to see the whole picture over a few years to see if there are any concerning trends rather than looking at a snapshot picture.  This would involve going the distance and keeping up and tracking the figures yourself through the years.

I hope this brief review of a council’s finances has been helpful to those of you who want to know more about what’s going on with your council financially!  Good luck!