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JULY 2017 ■ www.CPAPracticeAdvisor.com 19 BUILDING YOUR NICHE PRACTICE for Managing Nonprofit Finances used by decision makers to analyze tailored financial information using graphs and visuals that are easier to understand. They keep everyone on the same page by presenting information in an easily digestible format. Consistent monitoring of dashboard metrics can help avoid unpleasant surprises. Remember that better financial information leads to better financial decision making. UNDERSTAND YOUR LIQUIDITY AND AVAILABILITY OF RESOURCES Liquidity is the term used to describe how easy it is to convert assets into cash. The liquidity scale then ranges from fairly-liquid assets like CDs or shares of stock, to illiquid assets like real estate, because it can take weeks or months to sell. Liquidity ratios can be used to measure an organization's ability to meet its near-term financial obliga- tions like rent, payroll, mortgage payments or payments against a line of credit. For example, the "current ratio" is the proportion of current assets available to cover current liabilities. Availability of resources for general operating expenses is key when considering liquidity. The measure should be to assess "Liquid and Available" resources. Bankrate.com offers a great cur- rent ratio calculator that compares current assets to current liabilities. This ration can give you the informa - tion you need to plan for covering upcoming payments. It's a smart idea to benchmark your organization's financial health and liquidity ratios against your "peer group." The financial statements for most New York state charities can be found on www.charitiesnys.com . PAY CLOSE ATTENTION TO THE BALANCE SHEET Nonprofit organizations tend to overlook the importance of the state- ment of financial position or "balance sheet" and focus instead on the "income statement" or "statement of activities" showing net income or loss for each period reported. The balance sheet measures the financial strength of an organization, while the income statement reports the profitability for one particular reporting period. For example, the income statement doesn't reflect when your accounts receivable will come in. You must also review line items on the balance sheet that need to be reassessed to determine whether they should be written off or written down. The board should focus on the balance sheet and obtain periodic reporting on specific balance sheet items such as accounts receivable. Use an aging report to identify old receiv- ables that may become uncollectible. PROVIDE ETHICAL LEADERSHIP BY EXAMPLE The ethical environment that is cre- ated by the organization's board of directors and top management has a trickle-down effect. The tone set by the board and management should promote ethics, integrity, honesty and transparency by clearly co mmu- nicating expectations and leading by example. At a minimum, organizations should enforce their conflict-of- interest policy and communicate the code of ethics to employees. The board should conduct annual performance evaluations of its paid senior staff, including all its "C-Suite" executives. CONCLUSIONS There is no single factor or "silver bullet" that a nonprofit can seek nor rely on to provide a comprehensive evaluation of the effectiveness of its governance policies. There are numer- ous elements on financial statements that need to be viewed in a holistic manner. Comprehensive reporting, in an easy-to-understand format, will help board members and senior staffers bet- ter meet their fiduciary responsibility, and avoid costly (and potentially fatal) financial mistakes. ■ relevant - empowering board mem- bers to be inquisitive and able to judge the soundness of the financial statements. The organizat ion's financial reporting should help them recognize warning signs of potential financial problems. Elements should include a statement of financial position (balance sheet); a statement of activities (income statement); and a cash flow statement. Another report should compare budgets vs. actual expenditures on a monthly, quarterly and annual basis. ■ Ensure reporting accuracy with annual external audits… Compare/ r e c o nc i l e i nt e r n a l f i n a nc i a l repor t s w it h year-end aud ited financial statements certified by an independent CPA. ■ Seek timely financial reporting that will deliver essential financial information to the board as quickly as possible, w it h relevant and complete financial data – delivered for each monthly board meeting. ■ C r e at e " P r o f i t a n d L o s s b y Program" tools t hat illust rate income and expenses for each major program. ■ O f fer t ra i n i ng t o help b oard members understand financial information… Not ever y board member has a financial background, or knowledge of how to d igest f inancial statements. Training will empower board members to ask relevant questions and hold management accountable. ■ Re c r uit b oard memb er s who are f inancial professionals to strengthen the board's ability to prov ide meaning ful oversight. These may include accounting or finance professionals – such as certified public accountants (CPA) or certified financial analysts (CFA). At the end of the day, every board member needs to be willing and able to ask relevant questions about the nonprofit's financial con- dition. They will need to understand basic financial terminology, and be able to read the various financial statements. Board members must be vigilant for signs of potential financial problems. Smart questions nonprofit orga- nization board members might ask could include: ■ Do we have adequate cash-flow to meet our operating requirements? ■ Is our financial reserve sufficient to weather potentially bad economic times in the future? ■ Do we have a prudent investment strateg y that delivers adequate returns vs. risk exposure? ■ A re we mon itor i ng ac t ua l v s. planned expenditures? ■ Are there checks and balances in place to flag errors, prevent fraud and safeguard our finances against potential abuses? ■ Are the receivables fully collectable? ■