By: Rachel Luoma, MS, CAE
Yes, you heard me right – I used financials and fun in the same sentence!
One of the most important aspects in any organization, whether for profit or not-for-profit, is the ability to maintain strong financials. For “type A” folks like me, just talking about financial statements gives me quite the rush. However, no matter what your personality type is, it is imperative to fully understand your association’s financials.
Let’s begin our discussion with the adage, “cash is king”. What this statement refers to is how having strong positive cash flow is one of the most important elements of a solid financial position. Positive cash flow will ensure that your association is able to meet its current financial obligations and provides opportunities to fund future endeavors.
Are you having fun yet?
The balance sheet is one of the most important aspects of financial management as it provides you with a snapshot of the financial health of the association at a given time (see http://www.c6accounting.com/balance-sheet-basics-association-professionals/ for a deeper understanding of the balance sheet).
The balance sheet will express, at a glance, important numbers that tell a story about the health of the association. For example, it will provide the association assets including, amount of the money you have in the bank, accounts receivable, investments, pre-paid expenses (for accrual based accounting organizations) and fixed assets. It will also provide details of the association’s liabilities including outstanding payables, deferred revenue (for accrual based accounting organizations). Finally, it presents the equity of the association – the assets that the organization possesses minus the liabilities or debt of the association.
There are three main questions you should address each time you look at your balance sheet.
- What numbers are going down that should be going up?
I will give you a primary example. For the third month in a row, we noticed that one of our associations was losing money in investments. We felt that since it was the third month in a row, some additional investigation was required. We surveyed the market and realized that other organizations were seeing a positive change in their investments, while we were seeing the opposite.
This prompted us to reach out to our financial advisor to determine if something needed to change. We were able to move the association’s investments into a different fund and have seen a large positive swing in our portfolio. It is only because we paid attention to these numbers that we were able to mitigate some of the loss in investments.
- What numbers should be going down that are going up?
For example, accounts receivables (A/R) is one of those numbers that ideally you would like to keep low. This is money that is owed to the association that hasn’t been paid yet. It is important to keep this number lower as it means that outstanding money owed to the association, such as advertising, royalties, etc. have been paid. If you see this number increasing on a consistent basis, it may mean that further investigation is warranted.
What questions should you ask?
- What does the aging report look like?
- Why is it taking so long to receive payment?
- Is the amount of recorded A/R correct?
- Was the money received and not recorded properly against the A/R?
- Is this trend in line historically or is it a new trend?
- Is there a system in place for invoicing and following up with those who owe you money? Is it not working?
Answering these questions should help you to identify root cause for any issues that may arise with outstanding A/R.
- What number should be changing that isn’t?
Just looking at what numbers go up or down isn’t enough when reviewing your balance sheet. You should also look at what numbers don’t change as these tell a story as well.
- Are you properly depreciating fixed assets such as equipment or property?
- Do you make adjustments for the amount of inventory you possess?
- Are your receivable or payable numbers changing? (i.e. collecting on bad debt, paying tax, releasing payables within a timely manner, etc.)
Bottom line is the balance sheet should be reviewed monthly and the current numbers should be compared to the numbers one year ago and several months ago so that you can sufficiently recognize issues.
By asking these important questions you may be able to ensure that your association maintains a healthy financial position – what can be more fun than that?