The Statement of Performance (consisting of Statement of Income and Statement of Other Comprehensive Income) has to be questioned, first Revenue then Expenditures
The questions that apply to revenues raised to support operations tend to be identical for the many potential sources. They are:
- Who provides each category of revenue to the organization and why? Are there restrictions on how these revenues are used?
- What are the costs associated with raising this kind of revenue? Is the effort of raising these funds worthwhile? Are there opportunities to increase revenues from this source?
- In particular, what are our fundraising expenditures as a percentage of funds raised? How does this compare with similar charitable NPOs? Are the fundraising costs warranted, relative to the benefits received? Do we have fundraising protocols that provide guidance to management?
- Who are our competitors for these revenues? Do they represent possible collaborators?
- Have we remained true to our mission in pursuing funding for specific programs, or have we focused too much on acquiring the revenues, even if the activities funded blur our focus (so-called “mission creep”)?
- Are there revenues devoted for a specific program, project or activity? Do these revenues include funding to sustain the organization’s overhead (so-called “core funding”)? If not, how is infrastructure to be funded as the program, project or activity places greater stress on it?
- How do we go about soliciting these revenues? Are we adhering to board policies or standards around ethical fundraising activities?
- How secure is each source of revenue for future periods?
There may be additional questions related to certain components of revenues:
- What is the source of investment income? What is our target return on investments? Is this achievable in the current economic climate?
- What is included in other income? Should any of these components be reported separately?
Here are some potential questions related to the major components of expenditures:
- What lies behind the expenditures on salaries and benefits? Where in the organization are employees deployed? What is our compensation policy? When did we last award raises and when is the next scheduled change? What benefits do we provide our employees? How do we handle vacations and vacation pay? How does our compensation stack up in the marketplace? How senior is our staff group? What costs would we incur if we had to lay off staff?
- What explains rent and occupancy costs? What spaces do we rent (or own)? What are they used for? Are they sufficient? What are the major lease/rental terms? How long until we have to move or negotiate a new lease?
- What is the nature of our marketing and communication costs? How do we select communications channels to use, especially new, digital media channels? How do we identify, select and reach our target audiences?
- What lies behind the charges for equipment rental? Has the “rent vs. buy” analysis been undertaken?
- What is the policy for amortization of capital assets?
- What is included in other expenses? Should any of the items be disclosed separately?
As with the Statement of Financial Position, directors will want to compare the figures in the Statement of Operations for the current year to the previous year. Significant changes over time (both increases and decreases) may well spark questioning. Of particular interest will be the last line: Excess (or deficiency) of revenues over expenditures, leading to a careful review of the factors that drove this result.
Directors are encouraged to undertake their own calculations of certain items not appearing directly on the Statement of Performance, such as the percentage of total revenues each revenue source represents. Some organizations, for instance, are heavily dependent on government grants (and, indeed, in some cases, government grants from a single source). Other organizations may be heavily dependent on donations, which in turn are dependent on the state of the economy.