Financial people frequently use terms that other people never utter. In this two-part series, I’m lifting the veil of obscurity on accounting language so you know what it means, when it’s important, and what to do for the well-being of your organization (or to show that you’ve clued in). If you missed my first few explanations, you can find the article here .
Often the reason given for an item being over or under budget is timing. This means that the budgeted amount will be met, but that it has happened more quickly or more slowly than planned.
Action required? No, unless this explanation is over-used, in which case, you should question why there are so many timing differences.
Equity (net assets)
In a for-profit company, the equity is theoretically what is left over for the owner(s) should the company shut down and all of the assets are sold and the liabilities paid. In practice, it is a balancing number of no use in the financial statements.
Action required? No. Just be sure that nobody thinks that the equity or net assets line represents cash the organization can use.
Beyond being the calculation of whether the money being received is greater than the money being spent, cash flow is important because of the emphasis put on it by many business people. Classic accounting theory says that accrual accounting is the best predictor of future cash flows because it includes all of the costs incurred, but in the short run, you need to have enough money on hand to fund the operations or the organization will simply not survive.
Action required? None, except to be sure that the details do not obscure the overall message. If, for example, in a given year, the cash flow is negative, i.e. more money is being spent than being received, then it is important to look at what the organization is spending money on. If a building is being constructed or major equipment purchased, than the cash flow could turn negative in an otherwise healthy organization. Be sure that the organization has money to pay its staff and contractors in this interim period.
Qualified (audit) opinion
The word itself is confusing. You want an unqualified opinion from a qualified auditor! In this case, qualified means limited, restricted or modified. In other words, if the auditor’s opinion states that the statements adhere to accounting standards except for, you have a qualified statement.
Action required? Because it is impossible to determine whether all the donations for some charities have been received, many charities routinely get a qualified audit opinion. If this is the case, don’t worry. Otherwise, talk to the auditors about what changes need to be made in order for them to issue an unqualified opinion.
Finally, and most importantly:
Choose either a) or b)
a) An opaque document comprehensible only to certified accountants and only then after much study, or
b) A summary of the economic activity of an organization that helps the reader understand the progress and vision driving the numbers.
Action required? Yes. It takes careful planning to create a set of financial statements that adhere to the appropriate accounting standards as well as giving a reasonably financially literate reader a clear picture of the activities of the organization. But it is worth doing. A clear financial picture of the past year helps your stakeholders make informed decisions about supporting you in the future, as well as confirming the value of their past support.