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Nonprofit Financial Reporting

20 Dec 2018

Nonprofit Board members are responsible for the governance of the agencies they serve. In order to accomplish this, they need appropriate information and they need to understand what that information is telling them. Understanding the fiscal strength and operations of an organization is paramount, but unfortunately it is one of the responsibilities of board members that doesn’t always get the attention it needs, as many board members don’t really understand the information they are presented with. So how do you make it easier for board members to comprehend this vital information?

Provide explanations:

Don’t just give board members financial information, also provide a discussion and analysis of the results. By adding a narrative as to what the financial information is saying and focusing attention to the important aspects of the financial information, it will be much easier for board members to make appropriate decisions. Make sure the analysis is easy to read, avoids technical language, and appropriately outlines the organization’s financial story. In addition, provide comparative information, budget to actual results, and explanations for significant variances.

Provide information on a programmatic level:

Many organizations rely on government funding. The way an organization is funded (fee for service verse cost based) could have a significant impact on a board’s decisions surrounding the program. In addition, understanding which programs are generating positive financial results and which ones are losing money can assist a board in making decisions as to whether the organization should continue to subsidize certain programs. When providing programmatic finances, make sure you segregate variable costs from fixed costs (overhead costs), because overhead costs often cannot be eliminated and will need to be borne by other programs should the decision be made to close a program.

Use Ratio and Trend Analysis:

Financial information can be very flat. Bring yours to life. Consider using charts and graphs that focus on meaningful ratios such as days in cash, or liquidity, or expendable net assets; show trends in these numbers over multiple periods so board members can understand if trends are moving in the right or wrong direction; and put information in perspective through benchmarking or standards so that Board members can understand if the results that they are viewing are positive or negative. Also consider developing meaningful dashboards that the board can review periodically. For example, a private school may want to provide a graphic on number of students currently enrolled, how many students are in the pipeline, how many students are graduating at the end of the year, etc. This can provide the board with a good understanding of the direction the organization is moving in.

Provide Financial Education:

If you want your board members to be better stewards of your organization’s resources, teach them how to better understand the information you are presenting to them. Board members need to process a lot of financial information on a regular basis … much of which can be very complex and, to be honest, dry. Boards often meet with the organization’s auditors to review financials and are responsible for reviewing the organization’s 990’s. In addition, they annually approve the Organization’s budget. Having presented to and served on numerous boards, I can tell you they don’t ask a lot of questions … not because they are not interested, but often because they don’t understand it. Consider providing training to Board members about nonprofit financial information, so that they are better equipped to understand how to read and comprehend the information you are presenting them with.

By providing your board members with useful financial information, in an easy to follow format, focused on the key factors they should focus on, put into context, with explanations, and then training them on how to better comprehend this information, your board will be much more prepared to make informed and appropriate decisions regarding your organization’s finances.