The balance sheet should be on top of the NFP boardroom agenda

The not-for-profit sector was under considerable pressure trying to meet demand prior to the coming of COVID-19. The implications of coronavirus included an increase in demand and an increase in the cost-of-service delivery for Australia’s NFPs. Economic uncertainty is simultaneously placing the sector’s already scarce financial resources under greater pressure.

According to Professor David Gilchrist, University of Western Australia Business School (UWA), the sector has had to apply substantial financial resources to continue providing vital services throughout the pandemic. This includes investing in training and personal protective equipment to ensure the health and safety of staff, changing service structures to meet immediate coronavirus prevention priorities as well as assisting government to ensure appropriate and timely responses to health challenges.

Maximising constrained financial resources requires clear visibility of the financial health of the organisation, and that starts with understanding the balance sheet. From effective cash and asset management to identifying financial red flags early, the balance sheet is no longer just the domain of accountants. Instead, it’s a tool that not-for-profit boards and management can use to better navigate future unexpected challenge for the benefit of those they serve.

How to be mission-ready

Professor Gilchrist says that understanding a not-for-profit organisation’s balance sheet is the best way for boards and management to evaluate the resources they have today and the resources they will need to continue to efficiently and effectively deliver on their mission in the short-, medium- and long-term.

Over a short-term horizon, this understanding enables not-for-profits to ensure they have the cash to pay staff and bills. In the medium-term, it allows not-for-profits to invest to develop and modify the organisation, its services structure and to ensure staff maintain their skills and capacity as things change in order to meet demand and changing needs as well as monitor growing financial obligations through provisioning for things like annual leave.

Longer-term, not-for-profits must have the financial resources to reinvest in the organisation to adopt technology and replace assets. This is crucial to maintaining operational flexibility in the face of change. “The balance sheet provides the information needed to help not-for-profits to be mission-ready in the short-, medium- and long-terms,” says Professor Gilchrist.

Ensuring the ability to serve communities well into the future is why not-for-profits must focus on generating a surplus to build their balance sheet and increase their capacity to grow. This naturally leads to considering the mix of services and support that are being delivered. Professor Gilchrist says that while some services are profitable, others are costly to provide and may not generate income, adding that “there has to be a balance to ensure profitable outcomes in the future and to ensure the mission is prioritised—it cannot be all profit and it cannot be all loss”.

Click here to download your copy of the Not-for-Profit Balance Sheet resource, jointly published by CommBank and the University of Western Australia.