Budget

Ten Tips for Reporting Financials to the Board

Ever had a moment of dread when preparing for a board meeting? Board meetings do not always have to be the event we wished we could skip. By establishing expectations for clear communication between board and staff and creating a common base of understanding of the company’s finances, your board of directors can become a foundational resource for your organization.

To uncover some of the best tips for financial reporting to your board, Young Associates interviewed senior managers and collated their views on handling financial reporting to the board of directors. We would like to thank Soundstreams CanadaPrologue to the Performing ArtsToronto Dance TheatreCrow’s TheatrePlaywrights Guild of Canada, and Dance Ontario for their support and assistance in creating these tips for financial reporting to boards of directors.

Now, for some tips on best practices:

  1. Don’t give up; the right Treasurer is out there! Just like dating…you don’t always meet the right one for you first time out. Seek a Treasurer with a strong financial background who can help you prepare and present board reports, address the Annual General Meeting, and support the development of the annual operating budget. It’s often a balancing act between accounting training or business skill, and an understanding of the not for profit world. Having the right credentials is great, but may ultimately be less important than finding a compatible person. So, finding a CA or Bank Manager may not be essential. If you’ve found somebody who has great technical skills, but is new to the sector, it’s up to you to help them deliver their best by cultivating their engagement with your organization and the sector.
  2. Gauge the financial comprehension level of your board. It’s not necessary for everyone on your board to be financially literate, but according to our interviewees, it’s extremely helpful to have multiple board members with at least a basic grasp of financial management. How much they understand the financial stuff will influence how often and how in depth financial reports are presented at each board meeting. With a board comprised solely of artists, you risk a lack of financial comprehension and understanding, making presenting financial data difficult, timely, and at times, ineffective. At the same time, if your board is comprised only of those with strong financial backgrounds but with little understanding of the organization’s mandate, then you risk focusing solely on financial matters and at the expense of other mission related topics that need to be addressed.
  3. Sometimes the ideal is not the realistic. While it would be nice to have a healthy balance of individuals with practical financial management experience and arts people (or people from whichever sector your charity occupies) on a board, most of the time, this is not the case. Ideally, it would be great if all board members read reports prior to the meeting, and attended all the organization’s events accompanied by some of their friends and colleagues. The reality is that some board members will not do that on their own accord. Learning from our interviewees, the best approach is to promote the engagement of all members, creating policies for them that ensure that their participation on the board will benefit the organization and its bottom line. Examples include attending 75% of the performances in a fiscal year, contributing an annual donation to the organization, and recommending colleagues with sought-after attributes. Although you may not reach the ideal, you can still reach a realistic goal with your board that benefits the organization, and communicate how the actions of board members impact the financial reality of the organization.
  4. People are always changing. Be prepared for that moment when your beloved Chair or Treasurer has reached their maximum time as a board member, and you have to go about finding a new one, (one you are worried will not be as compatible!) But that’s okay… and normal! Outlining the qualities and attributes that your previous member had, or ones that are missing from your current board will help narrow your focus in recruiting a new candidate. All of our interviewees have been in that position, and said they were open to recommendations and referrals from other board members, colleagues, and confidants. Remember, the point in the recruitment cycle when you need to pay attention is when the new VP is being sought. Start setting standards and building relationships then; thus, when they arrive as your new President, you have been grooming them for up to two years!
  5. Send out materials ahead of time. Sending out materials (board report, balance sheet, income statement) to your board members prior to the meeting gives them time to prepare questions and concerns in advance. It can save you time at the board meeting because it is anticipated that everyone will have reviewed the material. A board with members who possess strong financial comprehension skills may not need to see copies of the reports prior to the meeting – unless there is a specific issue at hand that needs to be addressed. For most of our interviewees, sending out the material ahead of time allowed some of their directors time to process the information, and save valuable meeting time.
  6. Not all board meetings need a balance sheet and income statement. If an organization has a Treasurer who possesses a background in chartered accounting, then that individual tends to keep such a close eye on the finances that regular viewing of the balance sheet and income statement would become redundant and unnecessary for both the Treasurer and the other members. This is not the case for most of our interviewees, who include a balance sheet and income statement in the board reports that are sent out at least a week in advance to the meeting, allowing them some time to review the month’s finances and keep up to date. Most of our interviewees use the balance sheet and income statement to continue engaging their board on financial matters, allowing for complete transparency of the numbers.
  7. Consider if your board meetings need to include a standard financial agenda. A common principle for financial reporting to the board is to schedule financial reporting at every single board meeting. For our interviewees, this varies based on the level of financial comprehension of their treasurer and board. For organizations with a strong Treasurer, financial matters would only be discussed if absolutely necessary. For other organizations, it becomes necessary to include a financial agenda at every meeting in order for everyone to be on the same page. Creating a standard agenda focusing on addressing any issues with the financial data is one way to encourage board members with limited financial knowledge to ask questions and become more engaged with the financial operations of an organization.
  8. Plan to connect with your treasurer before each board meeting. Most managers do not have a lot of time in a board meeting to talk at great lengths about the financial matters at hand; therefore, preparing beforehand with your treasurer can ensure that both of you are on the same page and more importantly, that they are able to understand your perspective on the finances. If your treasurer has a strong financial background, then he or she can help you determine the reality of your financial position, and work together to map out how to present the information effectively to the rest of the board.
  9. Board meetings do not have to occur every month. While common principles call for board meetings to run every month, most of our interviewees push it to every 6-8 weeks. Timelines can be affected by physical distance between members, and scheduling. While it is good practice to plan out each meeting date at the AGM, in reality many organizations decide on the date at the prior meeting. The most important thing to take away is that board meetings should be consistent and require all members to be present and prepared.
  10. Make sure your board is “on board”. Remember: your board members are the legal representatives of your organization. It is their responsibility to be committed to your organization by reading the board reports, engaging in the organization’s activities, and helping with fundraising initiatives. You shouldn’t have to parent your board members to make sure they do all their readings. Make it clear to the board what is expected of their position, and how beneficial their efforts are to the organization. It doesn’t matter if they come from a business, finance, or arts background: all of them are expected to be engaged with and updated on the events and happenings of the organization, as well as the financials. Make sure your board members are aware of their duties and do not get caught up in using their position as a resume booster, but rather they prioritize the mandate of the organization.

This tip sheet was created by Caroline Bendiner, Centennial College Intern from the Cultural Heritage & Site Management Program. Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, focused on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.

Disclaimer

If I have a surplus, why don’t I have any money?

It’s probably a timing issue.

You might be strapped for cash if you are paying off bills from past year losses. In the same way, if you’re doing some early spending on future projects, this year’s money might be flying out the door to get ready for next year.

You could also be tight if you haven’t collected all the money people owe you. For instance, maybe you’ve rented a lot of studio time or gathered a lot of event registrations. If those people have booked but not yet paid you could be in trouble. In the same way, you could have solid fundraising pledges, or a confirmed grant, but still be awaiting the funds.

If I have a deficit, how come I’m not broke?

It’s probably a timing issue.

This year’s losses might be floated by money that you made in the past.

Or perhaps next year’s money has started to arrive. This is common for performing arts companies that sell seasons on subscription: in the spring, when next year’s tickets go on sale, money arrives that might make you feel flush, but that actually should be carefully stewarded so it can be used to pay for the next season. In the same way, grant instalments might arrive early.

Perhaps the bank is in good shape despite your losses because you haven’t paid the bills yet. You may know that you’ve lost money, but still be awaiting invoices from suppliers.

Why is my budget different from my cashflow?

budget captures revenues and expenses that “belong” to a certain year. A cashflow shows money flowing into and out of your bank account.

Most revenues are received, and most expenses are spent, during the year to which they belong. However, in the early days of this year, you might still be collecting some of last year’s money (e.g. grant holdbacks and other receivables), and paying some of last year’s bills. In the later days of this year, you might start to receive or spend money in preparation for next season. And you’ll probably find that some of this year’s transactions just can’t be settled till the early days of next year.

Besides these timing issues, cashflow involves tax transactions that are not part of your revenues and expenses. For instance, everywhere in Canada we pay GST or HST (depending on your province) on the purchase of goods and services. Cash flows out to pay the sales tax – but for most organizations it’s partly or fully recoverable. Only the non-recoverable part is an expense.

The budget document doesn’t care about the timing of cash payments: it is based on the idea of accrual accounting, where revenues and expenses are “accrued” to the year where they belong, and the actual exchange of money might happen either earlier or later.

The cashflow document is all about the timing of cash, without respect to which year various things belong.

Ten Tips for Better Financial Planning

If bookkeeping is the bricks and mortar of your financial reporting system, then financial planning is the architecture; effective financial planning can better prepare your organization to respond whatever happens on a daily basis.

  1. Failing to plan is planning to fail. It’s an old saw, but a good one! You wouldn’t start on a long trip without a road map and a destination; by the same token, you shouldn’t launch a new year of activities without a financial plan that lays out some sensible goals – and boundaries. That plan is your annual operating budget – a statement of your programs and activities in dollars and cents. The budget is your financial road map, a key operating document approved by your board as a current-year operating policy, defining and quantifying your targets for spending and raising money.
  2. Put it in writing. Your plans will undoubtedly change as the year unfolds, and you respond to changing circumstances (a budget is an adaptable planning tool to help predict your future; financial statements are historical documents that record where you’ve been). However, keeping a clean copy of that initial budget is important! It serves as a yardstick for measuring your progress in fulfilling your plans – and your success at adapting them to your organization’s evolving situation. A written document provides a solid basis for comparing plans to results. It is also an excellent tool for sharing information amongst your organization’s leadership and staff.
  3. Share responsibilities effectively among your staff, board and volunteers. What’s effective depends on the nature of your organization and the individuals involved. For some charities, financial planning is staff’s hands-on responsibility, with board members in a governance role, approving the results or requiring changes. In other charities, board members – e.g. the President or Treasurer – take an active role in planning. Some have a Finance Committee, where volunteers outside the board contribute to the process. Often, smaller organizations need more volunteer support, and larger ones delegate more responsibility to staff. Consider what will work best for your organization at this moment in its life cycle.
  4. Identify and use all resources. Chances are, you recruited board members based on the skills, connections and support they could bring to your charity. Are your directors fulfilling those roles for your organization? If not, have you talked to them about stepping up to the plate? Consider, too, that your directors may be able to recruit colleagues or friends to provide pro bono support for specific needs. If your organization has an annual financial audit, don’t forget to use your auditor for accounting, planning and tax compliance advice. Your banker, broker, government funding officer and others should be able to contribute planning advice on trends and opportunities for your organization.
  5. Think about how to share financial information. Personal data such as staff compensation must, of course, be treated with care. More broadly, though, it is important to think about who needs to know about your charity’s financial situation, and at what level of detail. You wouldn’t want staff or volunteers to be worrying needlessly.But, if you need their input, you must provide enough information for them to offer an informed opinion. You can share financial data in a controlled way by preparing mini-statements by program or activity, as well as a complete operating statement. You can also prepare both detailed and summary (“high-level”) financial statements, to be disclosed depending on people’s level of engagement with the challenges at hand.
  6. Secure board buy-in to your plans. A charity’s board of directors is legally responsible for the organization. In situations where staff are front and centre in terms of running the show, board members may become complacent – but they are still on the hook! Staff should ensure that board members receive – and read – and understand – budgetscashflow projections, financial statements and other key financial planning documents. It’s important to be clear with your directors where the risks lie in your plans for the year. If those plans go awry, you need them to stand behind you and back you up. The organization’s financial plans must be the board’s plans too.
  7. Secure staff buy-in to your plans. Staff are instrumental in carrying out the plans for the year. The more they feel ownership of the targets set for their position or their department, the more invested they’ll be in achieving those goals. If belt-tightening is in order, you need your staff, especially those in leadership, purchasing and revenue generation roles, to be fully on board with whatever needs to be done. Develop appropriate ways to bring them into the process of brainstorming, generating options, and making decisions.
  8. Follow an annual planning agenda. If an organization is very project-driven, each year may be quite different from last year and next. However, many organizations have a well-understood annual routine. In these cases, financial planning should also follow a well-defined pattern where the tasks associated with creating, reviewing and adjusting plans happen in the same order, within about the same time frame, with the same participants each year. A written annual planning agenda (for instance, setting out key tasks by month) can be used to ensure staff and board understand what will be expected from them. Your planning calendar will also help you identify and meet external reporting deadlines, e.g. funding applications and tax returns.
  9. Create time for planning. Make sure your work schedule allows time to read and analyse financial reports, think about the implications, consider your options and prepare well-researched plans for your programs and overall operations. This is even more important for Board members who meet intermittently; get the financial statements to them before they need to act on them. The worst decisions are often the ones made under pressure in the midst of a crisis. If you’ve invested time in contingency planning – anticipating problems and brainstorming “what-ifs” and possible responses – you will be much better prepared to give a measured response and a sound decision.
  10. Take the long view. “Now” always seems to be the imperative. Staying on top of today’s demands can take all your time. However, this year is just one more milestone in your organization’s life. You need to consider this year’s plans in context with medium- and longer-term objectives. This year’s operating budget carries through from last year’s results, and it should help your charity achieve its plans for the future. Situating each year’s budget within a multi-year strategic plan is an excellent way to anchor your financial planning.

This tip sheet was created by Heather Young of Young Associates. Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, focused on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005)a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.

Disclaimer

Ten Tips for Drafting Your Annual Budget

Your annual operating budget is a key management and planning document approved by your board as a current-year operating policy. By defining and quantifying your financial targets, it provides a financial road map that can help you successfully navigate your cycle of programs, services, events and other activities. Creating a detailed plan, grounded in reality, is an essential first step to effective financial management.

  1. Format can support you. Treat your budget as part of a broader financial management effort, which embraces your accounting system, external reports (e.g. grants, taxation) and management reporting needs. Your budget categories should align with your accounts, and with the funding and tax forms that you need to complete. This integrates planning with records-keeping, and helps the bookkeeper, managers and board to speak the same financial language. Create a spreadsheet template and use it year over year. Base your financial report spreadsheets on the same template. Consistent formatting makes it easier to share documents and coordinate amongst staff, volunteers and board.
  2. A conservative approach: start from revenues. Here’s a good piece of advice – don’t spend money that you don’t have! If you start your budget process by thinking carefully about how much revenue you are likely to generate, you are less likely to “bluesky” your way through the expense lines and wind up with a deficit on the bottom line. This method is particularly effective for organizations with only a few years of history under their belts. Your past revenue achievements are likely to point to what you can reliably predict for this year, giving you reasonable boundaries for planning your expenditures.
  3. Testing a new idea: start from expenses. What if you’re launching a big new project? In this case, it’s important to consider what investment it would take to make your new activity a success. You may need to work your way through the expense lines first, and then think about how you will cover your costs.
  4. Start from knowns and work towards estimates. On both the revenue and expense sides of your budget, you will know more about some lines than others. For instance, you might have confirmed multi-year funding that you can slot into revenue lines, and leases, union agreements and employment contracts that you can plug into expense lines. At the other end of the scale, the forecasts for some lines may amount to educated guesses, based on past history and current circumstances. If you fill in the knowns first, you create a context that can support the process of estimating other figures.
  5. Start from last year’s actual results. Past accounting data can have strong predictive value. If this year’s operations are going to be similar to last year’s, and your charity’s circumstances haven’t changed significantly, then it can be effective to base your budget on previous actuals and adjust as needed for your evolving situation.
  6. Use reasonability calculations where appropriate. This technique breaks your budget estimate down into its components, and helps you think things through at a higher level of detail. For example, I could ballpark my advertising expense, or I could break it down to X ads times Y price. Similarly, I could break down my part-time staff expense to X individuals, times Y hours per week, times Z rate of pay. Not all budget items lend themselves to this treatment: categories that are catch-alls for numerous items, such as office supplies, may call for a ballpark figure.
  7. Research. Base your budget estimates on research where you can. “Hard” research may take you to catalogues, websites and quotes from suppliers. “Soft” research, such as advice from colleagues, can help you to develop sound options and to learn from others’ experience.
  8. Use building blocks. You can build your operating budget from smaller components by developing separate budgets for each program or activity. These add up to your plan for the year. To them, you will need to add an overhead budget, including administration and any other items that can’t readily be broken by activity (e.g. insurance, fire and security). This technique lends itself to a decentralized approach, where every program manager develops their own budget, and the executive director assembles the building blocks, and negotiates any changes required to make the operating budget work.
  9. Make an environmental scan. Charities can be highly vulnerable to changes in their environment. Donation and grant revenue is sensitive to economic circumstances, personal taxation and local labour market conditions. Political change can bring some issues to the foreground and back-burner others, and affect the availability of government support. Tax and regulatory changes can affect your expense picture. Stay in touch with the news, and consider how the changing environment may impact your budget forecasts. Remember, your bookkeeper should be a source of up to date details.
  10. Don’t idealize. And don’t catastrophize either. It can happen that everything goes your way – or goes against you – but more often things are somewhere in the middle. In particular, don’t get hooked on a wonderful idea and assume that everything will fall in line to support your vision. Develop best-case and worst-case scenarios, then settle on an estimate somewhere in between, based on your assessment of what the contingencies might be.

This tip sheet was created by Heather Young of Young Associates. Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, focused on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.

Disclaimer