Avoiding the Faux Pas of Financial Presentations
The French words faux pas (commonly pronounced "foe paws") literally translate to "false steps," or violation of accepted rules. And if there's one arena in which our organizations tend to take false steps, it is in the preparation and presentation of financial data. The accepted rules in financial preparation and presentation are actually quite easy…and imperative. A majority of foundation and governmental funders will turn first to an organization’s financial statements to determine suitability for support. The same holds true for savvy corporations/businesses and major donors (individuals) considering large contributions. If the rules have not been followed, it is glaringly obvious and a sure ticket to the “no” pile.
Here are some basic rules we suggest that an organization institute to minimize financial faux pas:
1. Have all financial presentations prepared by someone who understands numbers, where they come from and what they mean. (These people, by the way, are a minority in our society.) In many ways, financials represent a form of foreign language. As financial documents are prepared, we must assume that those who ultimately will read these presentations actually speak this foreign language, and will make decisions based on interpretation of this language. “Faking” one’s way through the language of finance is a false step of the highest magnitude.
A related warning comes in selecting outside counsel and assistance in bookkeeping and financial presentation: Be certain to find counsel that understands the structure of the organization. Nonprofits and governments use different terminology than does business, and financial presentations are prepared with markedly (we’ve seen professionally-prepared financial statements for a Medicaid dental clinic that used a format standard to the manufacturing industry).
2. Remember that a budget is both a projection of income AND expense. Oftentimes, an organization provides good information on how it intends to spend its money, but offers no indication regarding likely sources of that money. Consider this data from the funder’s perspective: When reviewing a proposal for support, is it not important to have a complete picture of the intended sources of funding, as well as the likely use of these funds?
3. Make sure that the numbers add up. This sounds trite, but there often are mistakes in financial presentations, particularly since these documents often contain dynamic (changing) information. In the course of finalizing the financial presentation – and ensuring that it “jives” with any narrative presentation – check on the accuracy of numbers as a last step before hitting the Print button.
Similarly, make sure that numbers are consistently presented throughout a proposal. It is not unusual to edit a proposal wherein an organization asks for $10,000 in funder support in the cover letter, $15,000 in the application summary, $15,000 in the narrative and then attaches an income budget that shows the money isn’t needed at all. This can easily happen as a proposal “grows” and changes, but needs to be 100% consistent in the final analysis.
4. Clean things up. Organizations often have a long list of inactive accounts that show up on the financial statements, typically as $-0- line items. Get rid of them. Likewise, remember that external “audiences” (funders, for instance) may not understand the coding, acronyms, jargon etc. with which an organization titles its income and expense accounts. Particularly with budgets, make available two presentations – one for internal audiences and one for external. The numbers should be exactly the same, but their presentation may be somewhat different.
5. Allocate “overhead” expenses in a manner that reflects how these expenses actually are incurred within the organization. An easy example of this is in considering the salary expense of an executive director. Assume for the moment that this person is paid $50,000 per year. In most organizations, this certainly is not a 100% “Administrative” cost. Rather, the salary should be allocated based on how the executive director spends his/her time. This may mean 10% Administrative, 40% Fundraising and 50% Client Services. (Determining these percent-ages may require a time study by the executive director). Similar allocations should be made for such expense line items as rent/occupancy, utilities, other staff, payroll-related expenses, insurance, training and travel, etc. This allocation method gives a more accurate portrayal of the “real” expenses being incurred by the organization’s centers of activity, and “sells” better when convincing external audiences of the agency’s ability to effectively use resources.
6. Do not expect funders to respond favorably to deficit spending practices. We have all read that funders do not allocate money to cover deficits; most apply this far more broadly to be interpreted “We don’t provide financial support to organizations that have a short-term history of operating in the red.” While this practice presents a bit of a chicken-and-egg phenomenon in getting an organization back on solid ground, it is best to concentrate resource development efforts on non-grant funders until the deficit problem is a year or two in the past.
Here are some basic rules we suggest that an organization institute to minimize financial faux pas:
1. Have all financial presentations prepared by someone who understands numbers, where they come from and what they mean. (These people, by the way, are a minority in our society.) In many ways, financials represent a form of foreign language. As financial documents are prepared, we must assume that those who ultimately will read these presentations actually speak this foreign language, and will make decisions based on interpretation of this language. “Faking” one’s way through the language of finance is a false step of the highest magnitude.
A related warning comes in selecting outside counsel and assistance in bookkeeping and financial presentation: Be certain to find counsel that understands the structure of the organization. Nonprofits and governments use different terminology than does business, and financial presentations are prepared with markedly (we’ve seen professionally-prepared financial statements for a Medicaid dental clinic that used a format standard to the manufacturing industry).
2. Remember that a budget is both a projection of income AND expense. Oftentimes, an organization provides good information on how it intends to spend its money, but offers no indication regarding likely sources of that money. Consider this data from the funder’s perspective: When reviewing a proposal for support, is it not important to have a complete picture of the intended sources of funding, as well as the likely use of these funds?
3. Make sure that the numbers add up. This sounds trite, but there often are mistakes in financial presentations, particularly since these documents often contain dynamic (changing) information. In the course of finalizing the financial presentation – and ensuring that it “jives” with any narrative presentation – check on the accuracy of numbers as a last step before hitting the Print button.
Similarly, make sure that numbers are consistently presented throughout a proposal. It is not unusual to edit a proposal wherein an organization asks for $10,000 in funder support in the cover letter, $15,000 in the application summary, $15,000 in the narrative and then attaches an income budget that shows the money isn’t needed at all. This can easily happen as a proposal “grows” and changes, but needs to be 100% consistent in the final analysis.
4. Clean things up. Organizations often have a long list of inactive accounts that show up on the financial statements, typically as $-0- line items. Get rid of them. Likewise, remember that external “audiences” (funders, for instance) may not understand the coding, acronyms, jargon etc. with which an organization titles its income and expense accounts. Particularly with budgets, make available two presentations – one for internal audiences and one for external. The numbers should be exactly the same, but their presentation may be somewhat different.
5. Allocate “overhead” expenses in a manner that reflects how these expenses actually are incurred within the organization. An easy example of this is in considering the salary expense of an executive director. Assume for the moment that this person is paid $50,000 per year. In most organizations, this certainly is not a 100% “Administrative” cost. Rather, the salary should be allocated based on how the executive director spends his/her time. This may mean 10% Administrative, 40% Fundraising and 50% Client Services. (Determining these percent-ages may require a time study by the executive director). Similar allocations should be made for such expense line items as rent/occupancy, utilities, other staff, payroll-related expenses, insurance, training and travel, etc. This allocation method gives a more accurate portrayal of the “real” expenses being incurred by the organization’s centers of activity, and “sells” better when convincing external audiences of the agency’s ability to effectively use resources.
6. Do not expect funders to respond favorably to deficit spending practices. We have all read that funders do not allocate money to cover deficits; most apply this far more broadly to be interpreted “We don’t provide financial support to organizations that have a short-term history of operating in the red.” While this practice presents a bit of a chicken-and-egg phenomenon in getting an organization back on solid ground, it is best to concentrate resource development efforts on non-grant funders until the deficit problem is a year or two in the past.
