Financial statements

A Guide to Reading Your Club Financials

This guide will give you a basic understanding of how to read and interpret financial statements, enabling you to better understand the financial health of your club. 

In essence, you are looking for items that vary significantly from the budget, either up or down and the reasons behind those variations.

Examples include higher than anticipated membership numbers (fees), increases in power bills post budget or maybe the budget itself wasn’t accurate when approved.

For more information regarding the terms used in this section, see: Financial terminology.

The balance sheet

The balance sheet (which can also be known as the ‘Assets and Liabilities Statement’) provides a snapshot of the club’s financial position at a specific point in time. It lists the club’s assets, liabilities and members’ equity.

The balance sheet tells you about the liquidity of the club (i.e. whether you have enough money to pay your bills as they fall due), whether assets are overstated or whether liabilities are understated and the club’s financial risk. The main points to look for in the balance sheet include:

Common terms on your balance sheet 

• Accounts Payable (sometimes called trade creditors) refers to bills the club needs to pay in the next 12 months. These are typically unpaid invoices for goods or services that the club has received, but not yet paid for, such as an unpaid invoice from the local butcher for sausages used at last month’s fundraising event.
• Trade debtors (also known as accounts receivable) are the amounts of money owed to the club for goods or services provided on credit. They’re considered an asset because they represent funds that will be received in the near future. For clubs, this is typically where you’ll see the value of any outstanding membership fees.
• Inventory is your stock on hand, such as uniforms or food and drink you have in the canteen.
• Current or Non Current is used to describe your assets and liabilities. Current assets and liabilities are expected to be used or received within one year (e.g. cash in a bank account or bills due for payment), while non current will take more than a year to sell or repay (e.g. building assets or long-term loans).
• Members’ equity or Members’ funds represents the current financial value of the club. It is what is left over after liabilities are subtracted from assets.

Positive working capital: can you cover short-term debts?

Is the total of your current assets greater than the total current liabilities?

If yes, good! This generally means the club can cover its debts as they fall due. This is called positive working capital.

Risk alert: potential short-term debt issues

Is the total of your current assets less than the total current liabilities?

Red flag time! This means that you may not be able to pay your bills when they fall due, and there is a danger the club may become insolvent. It is illegal to trade when insolvent so strong action is required immediately. The alternative is winding the club up.

Understanding long-term asset valuation

Do you know how non-current assets are valued?

It is important for management committee members to understand how their non-current assets are valued so that they are not under- or over-valued. A finance professional can give your club more advice regarding asset valuation and how it may affect your club.

Members’ equity growth: analysing the cause

Is the total members’ equity larger than it was in last year’s balance sheet?

If so, do you know what has caused the increase in assets or decrease in liabilities?

Profit and loss (P&L) statement

Your club’s profit and loss statement (which can also be known as an income statement) summarises your income, expenses and net profit for a specific period.

The profit and loss statement tells you where your club receives money from and where it is spent.

The main points to look for are:

• Income sources: clarity and detail

Does the statement tell you where all income is coming from?

For example, membership fees, sales, grants or sponsorship? Are the income accounts detailed enough to tell you this? Do you need more explanation from the treasurer or auditor around categorising income?

• Budget vs. actual: analysing profit and loss variations

Compare the profit and loss statement against your club budget for that financial year or request a report showing the variances. Are there any significant variations?

For example, if membership fee income is lower than the budget by 20%, has there been a significant drop in membership numbers, or a people not being chased up for payment? If expenses for repairs and maintenance have exceeded budget by 30%, do you know what repairs and maintenance caused the increase?

Are there any major differences that you cannot immediately explain? If so, time to dig until you can account for the variation.

• Impact of one-off transactions on profitability

Have there been any significant one-off receipts or payments?

For example, grant income or significant infrastructure repairs. It is worth considering how the income statement would appear if these items were removed. Would the club still have made a profit?

• Net profit analysis: understanding variations over time

Review the net profit percentage from this period to the last periods.

Can you explain why there is a difference? Net profit, also referred to as net income or net earnings, represents the total income minus all expenses.

Did you know? In financial statements, red numbers or numbers in brackets are negative or a loss.

The cash flow statement

The cash flow statement explains the ebbs and flows of your bank balance through the financial year. Having enough money in the bank is critical to the survival of your club and to ensuring that the lights can stay on!

Not all clubs will present a cash flow statement as part of their audited financial reports, but it is a valuable tool for the management committee in determining when the best time is to purchase large items or when to tighten your club’s belt.

Common terms on your cash flow statement

• Operating activities are your day-to-day business operations. These include income and expenses that have been collected and paid during the year in relation to running your club.
• Investing activities involve the purchase or sale of fixed assets that support the club’s business, including property and equipment.
• Net cash flows from operating activities represents the total amount of money a club generates or spends through its core business operations, providing a key indicator of the club’s financial health.

The main points to look for are:

Assessing operating cash flow

Are the net cash flows from operating activities positive or negative?

If this figure is negative, it means that you have spent more than you have made. This is a financial ‘red flag’ and the management committee needs to understand why this has occurred. 

Ensure committee approval 

Check the payments in the investing activities and financing activities section. Have these been previously approved by the management committee?

Comparing yearly statements

Compare this year’s statement to last year’s statement. Can you see anything unusual in the payments or receipts?