Understanding Financial Statements
Financial statements help clubs, boards, and members understand how money is earned, spent, and managed. This guide breaks down the three key financial statements in an easy-to-understand format, helping readers gain confidence in reading and interpreting financial reports.
Balance Sheet (also called the Statement of Financial Position)
What it shows: A snapshot of the organisation’s financial position at a specific point in time – what it owns, what it owes, and what it’s worth.
Key sections:
- Assets: What the organisation owns (e.g., cash, equipment, property)
- Liabilities: What the organisation owes (e.g., loans, unpaid bills)
- Equity: The net worth (Assets minus Liabilities)
Why it matters: The balance sheet helps you understand financial stability and whether the organisation can meet its obligations.
Further information on balance sheets can be found https://business.gov.au/finance/financial-tools-and-templates/set-up-a-balance-sheet
Income Statement (also called the Profit and Loss Statement)
What it shows: The organisation’s financial performance over a period of time – how much it earned and how much it spent.
Key sections:
- Revenue: Money earned (e.g., membership fees, grants, fundraising)
- Expenses: Money spent (e.g., salaries, utilities, equipment)
- Net Profit (or Loss): Revenue minus Expenses
Why it matters: It helps assess whether the organisation is operating within its means and making a surplus or running a deficit.
Further information on how to set up also can be found https://business.gov.au/finance/financial-tools-and-templates/set-up-a-profit-and-loss-statement
Cash Flow Statement
What it shows: Where cash is coming from and how it is being spent over a set period. It shows how well the organisation manages its cash.
Key sections:
- Operating Activities: Cash from normal operations (e.g., income and expenses)
- Investing Activities: Cash used to buy/sell long-term assets (e.g., equipment)
- Financing Activities: Cash from loans or fundraising
Why it matters: Even a profitable organisation can run into trouble without enough cash. This statement helps track liquidity.
Further information on how to set up also can be found https://business.gov.au/finance/cash-flow/set-up-a-cash-flow-statement
Financial Ratios
Financial ratios are created by using data from your financial statements to gain information about your business. Analyse the data to assess your business’s profitability, liquidity, operating efficiency and leverage.
There are a range of ratios you can use – the most important financial ratios are explained in our quick reference guide to financial ratios or Guide to Financial Ratios
The Importance of Seeking Guidance
While this is designed to simplify financial statements, it’s important to remember that interpreting financial data correctly can have a significant impact on your organisation’s success. Don’t hesitate to seek guidance from the Treasurer, Director of Finance or an internal accountant, an external accountant or an external advisor. (not sure why the Treasurer or DOF are included as they may not be accounting professionals).
These professionals can provide valuable insights, help you understand the bigger picture, and ensure you’re making informed financial decisions that align with your organisation’s goals and responsibilities.
Key Tips for Reading Financial Statements
- Compare over time: Look at trends over several months or years.
- Ask questions: If something isn’t clear, seek clarification from the Treasurer or Director of Finance.
- Look at ratios: Useful indicators include current ratio (assets vs. liabilities) and net profit margin (profit as a percentage of revenue). Discuss the calculation of the current asset ratio and what it indicates being the ability to pay the current liabilities with the cash at bank / on hand and other assets that can be quickly converted into cash.
- Link the statements: All three statements connect. For example, a profit on the Income Statement increases equity on the Balance Sheet. The Cash on the Balance Sheet equals the cash on the Cash Flow Statement.
- Seeking Guidance: if in doubt, always speak to your Treasurer, Director of Finance, internal accountant, an external accountant or advisor.
Final Thoughts
Understanding financial statements doesn’t require a finance degree. With a basic grasp of the three main reports and a willingness to ask questions, you can make informed decisions and contribute meaningfully to financial discussions in your organisation.
This guide is a general overview. For organisation-specific advice, refer to your financial reports or consult with your Treasurer or Director of Finance.
https://www.acnc.gov.au/tools/factsheets/establishing-strong-financial-controls-your-charity
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