Nonprofit organizations play a vital role in our communities, but understanding their unique financial structures and governance requirements can be challenging. A recent presentation by Julie Davis, CPA and Stephanie Smith, CPA from Rivero Gordimer & Company, offered valuable insights into reading nonprofit financial statements and best practices for board governance.
Here are the key takeaways:
Understanding Nonprofit Financial Statements
Nonprofit financial statements feature unique terminology, special items like pledges and endowments, and specific standards for revenue recognition. Understanding net assets, classified statements, and these distinct elements is essential for accurate financial assessment and planning in the nonprofit sector.
- Unique Financial Statements: Nonprofits use different terminology for their financial statements, including the Statement of Financial Position (balance sheet), Statement of Activities and Changes in Net Assets (income statement), Statement of Cash Flows, and Statement of Functional Expenses.
- Special Considerations: Nonprofit financials often include unique items such as pledges and bequest receivables, beneficial assets held by others, and endowment funds. Understanding these elements is crucial for accurate financial assessment.
- Net Assets: Instead of equity, nonprofits report net assets, divided into “with donor restrictions” and “without donor restrictions.” This distinction is important for managing and honoring donor intent.
- Classified vs. Unclassified Statements: A classified Statement of Financial Position provides more precise insight into short-term and long-term assets and liabilities, aiding in better financial planning.
- Revenue Recognition: Nonprofits have unique revenue recognition standards, particularly for contributions and grants. Understanding these differences is essential for accurate financial reporting.
Board Governance Best Practices
Key aspects of effective nonprofit board governance include policy implementation, board member recruitment, onboarding, fundraising responsibilities, financial oversight, and succession planning. Understanding these elements is crucial for maintaining a committed, engaged, and effective board that will ensure the organization’s long-term success and sustainability.
- Policy Implementation: Essential policies include a code of ethics, conflict of interest policy, whistleblower policy, financial management policy, gift acceptance policy, and social media policy.
- Board Member Recruitment: Ideal board members should be committed to the mission, have fundraising skills and leadership abilities, and be willing to contribute time and resources.
- Onboarding and Engagement: Proper onboarding, ongoing training, and regular in-person interactions are crucial for keeping board members engaged and effective.
- Fundraising Responsibilities: Board members should deeply understand the organization’s mission, lead by example through personal contributions, and help identify and cultivate donors.
- Financial Oversight: All board members have a fiduciary responsibility to ensure the organization’s financial health and sustainability. This includes understanding financial statements, monitoring cash flow, and establishing financial performance metrics.
- Succession Planning: Preparing for future leadership needs is vital for long-term organizational success. This involves identifying potential leaders and ensuring a diverse skill set on the board.
Navigating Challenges with Strong Governance and Financial Management
The nonprofit sector continues to face challenges, particularly in fundraising and volunteer engagement. However, with strong board governance and a clear understanding of financial management, organizations can navigate these challenges effectively and continue to make a positive impact in their communities.
Nonprofit CPA’s
For over 40 years, Rivero Gordimer & Company has been an industry leader serving over 150 local and national nonprofits annually, including civic, social, health, welfare, educational, arts, cultural, religious organizations, trade associations, and private foundations.
Our expertise ensures compliance with Government Auditing Standards (Yellow Book) and the Uniform Guidance, allowing you to focus on your mission.
As the exclusive Tampa Bay member of Nonprofit CPAs, a national network of independent accounting firms, we deliver exceptional financial and consulting services. We are proud to be recognized for our leading practices and superior service in the Tampa Bay region.
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