“Accounting is the language of business.” - Warren Buffet
Whether you’re an Executive Director, CEO, or board treasurer, it is absolutely in your best interest to understand the basics of nonprofit financial reporting. As a continuation of what Warren Buffet mentions above, if you don’t understand how to speak the language of business, how can you effectively guide and manage an organization?
Here are 10 signs that you need to develop your financial literacy:
1. When you look at your financial statements your mind goes blank.
At first, we’re all uncomfortable deciphering financial statements. But with time and effort you’ll soon know your financial statements inside and out. Once you’ve built confidence in your financial literacy, soon thereafter comes confidence in leading your organization in the right direction.
2. You don’t know the difference between a statement of operations/activities and the statement of position.
Understanding which statements to look at to answer specific questions will give your audience confidence in your ability to read financial statements. That boost helps others be confident in your ability to guide the organization.
3. You don’t know where or which statement to find your ‘cash’ on.
If you don’t know how much cash you have, you can’t determine if you can make your next payroll or not, or which bills to pay.
4. You can’t tell if you’re operating at a surplus or a deficit.
It is essential to the longevity of an organization to operate at or near a surplus year over year in order to continue delivering your programs. If you can’t tell whether or not you’re on track to maintain the organization on a year to year or even month to month basis, there is a chance you’re headed for trouble.
5. When you don’t know which statement to find your total revenue on.
Again, if you don’t know where some of the key numbers on your financials are, you’re doing a disservice to your organization.
6. If you look at a budget vs. actuals report, and you can’t tell if you’re doing better or worse than the plan.
I’m a huge believer in building out a very specific budget plan every year. In order for an organization to accomplish its goals, it needs to be financially prepared. In order to be financially prepared, an organization needs to determine its budget and cash flow. If you can’t tell if you’re on track with your budget, you may not be able to accomplish your organizations goals.
7. If you look at your operating actuals vs. prior year report and you can’t tell if you’re doing better or worse than the prior year.
If you plan on growing your programs or membership, it’s crucial that you can determine whether or not your organization is also growing over the previous year in order to facilitate further growth.
8. When asked what your expenses were for the month you respond with the number in the Accounts Payable balance.
This is the wrong answer and stating as much would likely worry those who asked the question. This lack of insight into your organization could result in a loss of confidence in your ability to make decisions and lead the organization.
9. When you feel uncomfortable presenting your organization’s financial statements to the board of directors.
Feeling a lack of confidence or completely out of place is something that no one enjoys. If this is how you feel when presenting your organization’s financial statements then it’s just a matter of increasing your financial literacy, and therefore your confidence in the subject matter.
10. When asked questions about your financial statements during a presentation your every response is that you’ll have to look into it and get back to them later.
If this is a consistent theme for you then it may just be a lack of preparation. However, a lack of preparation can come across as a lack of knowledge or proficiency. In which case you would again open yourself up to appearing as though you have a lack of competence in the area of financial literacy.
If any of the issues above seem familiar to you then I would highly recommend that you seek out some resources in order to improve your financial literacy. There are droves of information online that can help increase your knowledge about reading and understanding financial statements. If you don’t always trust what you read online, then I would recommend asking your board treasurer or accountant to cover financial statements with you.