- January 1, 2011
- Posted by: afr
- Category: AFR First Thoughts
Financial statements are simply methods to communicate certain financial conditions. However, their appearance at board meetings has been known to trigger beads of cold sweat, elevated blood pressure, temporary lapses of consciousness, and the occasional yearning for a tropical beach, far, far away.
The fundamental accuracy of these statements may be spot on. However, it is possible that what’s presented is way too much information to be adequately understood, and numbers encased within summary “snapshots” might not be as helpful as intended. To put it another way, you can’t always be certain you know where those numbers have been.
A suggestion to help you plug into the business side of your org more effectively is to identify one or two key ratios that are meaningful to you, and track those on your own. In this manner, you know the question(s) you’re asking, and you know which numbers you’re using to generate your answer. In short, you own that math.
Easy targets might be “total admin costs vs. total revenue”, or perhaps “total fundraising costs vs. total contributed income”. Grab a couple of big, obvious numbers that (in theory!) should be (a) related, and (b) found on any income statement, and watch how their relationship shifts from point to point.
Or perhaps watch an interesting element affecting your org’s cash flow. One of my personal favorites is “total deferred revenue vs. total cash”. Ideally, your org isn’t already spending cash that’s been received and promised to support next year’s activities.
A couple of final thoughts. Understand the context of the information you compare and verify there is a reasonable relationship between the numbers. For example, tracking “corporate contributions vs. office supply expense” will definitely generate data. It’s just unlikely that data will be particularly relevant or helpful.
And finally, be sure to remember! Ratios are only a general indicator of financial conditions. Apparent deviations should only be used as a point of departure for further inquiries and/or analysis, with the help of your org’s financial professional, and not as conclusive ends in themselves.
These pursuits will help keep you engaged in your org’s financial health. And as much as your org needs your passion for its mission, it needs your focused oversight as well.
For additional information or further discussion, do drop me a line!