Discover How Nonprofits Are Transforming Their Financials Now!

One of the biggest financial mistakes I've ever seen is when a nonprofit looks at their bank account to decide whether to spend money on a new project.  Worse yet, when a nonprofit’s finances are tight and they're barely scraping by to pay the bills, they’ll often check the bank account to decide what to spend. It's a huge mistake, and here’s why…

Your Financial Reports Are Not Your Check Register

     First, let’s think about this from a practical and personal perspective: If you are looking solely at your present bank balance to decide whether or not you can afford to make a purchase or pay a bill, you’re not considering scheduled payments or things that haven’t happened yet. The balance amount you see online this week is not reflective of next week’s bills. Whether it’s a scheduled draft that will post tomorrow or a check you wrote and forgot about, your balance does not tell you what you can actually afford. For instance, I often see discrepancies where a purchase is made on a card, but the business forgets to close the register, meaning the transactions aren’t batched and sent to the bank yet- so, out of sight, out if mind! If you’re relying on your online bank balance, you’re going to be duped! You’ll overdraw your account by taking out money when you really shouldn’t. 

     So how does that example apply to what’s happening in a lot of nonprofits? When you use your financials like a glorified check register, you might as well ask your online bank balance for permission to make a big purchase. If you’re only looking at cash, you are completely missing two very important pieces of your financial picture:

•  Liabilities- Consider all the things you owe. Liabilities include bills that you’ve entered but not paid yet. (Yes, you should be entering your bills even before you pay them!) Your nonprofit liabilities also include loan payments or other long-term obligations that you don’t want to overlook. 
•  Net Assets- What are net assets? According to GAAP (Generally Accepted Accounting Principles), net assets come in two categories- with restrictions and without restrictions. 

But, here’s my CFO pro tip: We really need FOUR categories…

Four Types of Nonprofit Net Assets  

1.  Non-Liquid Net Assets- These are non-liquid because the funds are tied up in fixed assets. To calculate your non-liquid  fixed asset amount, take the value of a fixed asset from your balance sheet, and subtract it’s loan balance (this number will change monthly). The difference represents the portion of that asset which is non-liquid. 
2.  Designated Net Assets- This represents anything for which your board has already decided to set money aside. A classic example of designated net assets is is cash reserves. You may have a grant that requires you to maintain cash reserves. Perhaps you’ve developed a practice of keeping three to six months of expenses as a backup plan for unexpected circumstances. In either case, these funds should not be factored into your purchasing or programming decisions, even though they are liquid assets. 
3.  Donor Restricted Funds- If you’ve received a donation that was either solicited for a specific purpose or donated for a specific purpose, those funds are donor-restricted until spent. So how do you keep them from being absorbed into your budget? You categorize and track them on your net asset statement. 
4.  Unrestricted Net Assets- Unrestricted net assets are just that- unrestricted. This is the number you’re really looking for when making that budgeting decision. These funds are liquid. They haven’t already spoken for by the board, and they haven’t been earmarked by a donor. They’re literally without restriction or designation. This is the magic number that empowers you to make a more informed decision.

     By separating your net assets into the four categories above, rather than just restricted and unrestricted, you can literally transform your financial reports into actionable tools. Knowing your unrestricted net asset amount allows you to see what is actually available. I hope this better illustrates the vast difference between simply checking the cash on the balance sheet, and truly understanding which portion of that cash can be used when it’s time to make your next budget decision.