Show Me The Money
What your financial statements are telling you..
You may remember Cuba Gooding Jr.’s immortal line from the movie Jerry Maguire, “Show me the money!” Well, that’s what financial statements do. They show you the money. They show you where your Trust’s money came from, where it went, and where it is now.
Financial statements tell the money story of your Trust – what it has been doing and what it has to carry it into the future.
There are three main financial statements:
Profit and Loss or Income Statement
What is a Balance Sheet?
A balance sheet is a snapshot of what the Trust owns and owes at a fixed point in time.
Assets are things that the Trust owns that have value. They can either be sold or used to earn future income. Cash is an asset, property is an asset. Assets also include money owed to the Trust for services it has provided such as rental of a building or consultancy services.
Liabilities are amounts of money that the Trust owes to others. These liabilities can include money owed to employees for annual leave due but not yet taken, and obligations to pay for goods and services that have been provided to the organisation but not yet paid for. They can also include funds that have been given to the organisation but need to be repaid (loans).
Equity is sometimes called capital or net worth. It’s the money that would be left if the Trust sold all of its assets and paid off all of its liabilities. This leftover money belongs to the owners or beneficiaries.
What is an Income Statement or a Profit and Loss Report?
An income statement can be thought as a motion picture that shows how much revenue the Trust brought in over a specific time period (usually for a year or part year) and the associated costs and expenses. The literal “bottom line” of the statement usually shows the Trust’s net income or losses. This tells you how much the Trust gained or lost over the period.
Set of Stairs
To understand how income statements are set up, think of them as a set of stairs. You start at the top with the total amount of donations or earnings during the period. Then you go down, one step at a time. At each step, you make a deduction for the costs or other operating expenses for that same period. At the bottom of the stairs, after deducting all of the expenses, you learn how much the Trust actually gained or lost during the accounting period.
What is the Difference between the Income Statement and the Statement of Cash Flows?
Your income statement represents your revenue and expenses for a period; while the cash flow statement reports the inflows and outflows of cash. Your income statement doesn’t necessarily match your cash position, because of differences in timing between earning and receiving or paying cash.
For example, expenses due and reported in one month might not be paid until the following month. On the other hand, you might have borrowed money, which results in a substantial cash balance in the Balance Sheet, but you did not earn it, nor was it donated and you will have to pay it back, so it is not reported in the Income Statement as income.
What is the Difference between a Capital Asset and Current Expense?
Any expenditure which has a useful life of more than a year will most likely be capitalised. In other words, you can receive an economic benefit in the future from that asset. Examples include land, buildings and equipment. The costs of these assets are recognized as depreciation expenses as they are used up in the organisation. Depreciation represents the allocation of the cost over the useful life of an asset.
Expenses represent immediate decreases in economic benefits. Generally, current expenses are everyday costs of keeping your Trust going, such as the rates and utility bills. Sometimes the distinction between assets and expenses is subtle.
Budgeted and Actual Results
How to get on track and reach your financial destination
A budget is like a map. Without a map you may take a bad turn and then you realize you are suddenly headed in the wrong direction. It works the same way when planning a financial journey. Without a clear idea of where you’re going and what you can expect along the way, you may end up in the opposite direction you intended to go. Most organisations prepare a budget for every activity they engage in, as well as their normal operations. A budget will help you reach your financial destination.
At the end of every month or quarter, the budget is compared with the actual costs and income and any differences between the budget and the actual costs and expenses analysed. A budget variance is the difference between the budgeted or baseline amount of expense or revenue, and the actual amount. The budget variance is favourable when the actual revenue is higher than the budget or when the actual expense is less than the budget. Continuing our map analogy, you are checking that you are still on track and heading in the right direction.
Some organisations produce reports that compare month and year to date income and expenses against a full-year budget. They use this to track how the organisation is going month by month compared with how they expected the year to pan out, which may raise early warning signals.
Looking beyond the Financial Statements
Sometimes, you need to look beyond the financial statements to understand what is really going on. You need to know what’s happening in the wider economic community your Trust is in, understand the risks your Trust is facing and the opportunities offered. Understanding the story behind the financial statements will help you make decisions.