If you want managers to use your financial reports to help support your mission, make the reports timely, targeted, relevant, and informative.
Financial reports contain critical information for decision making, but the managers of nonprofit organizations won’t absorb that information if they don’t engage with the reports. The key to successful financial reporting is to motivate managers to read and understand your communications instead of giving them a quick glance and filing them away (or worse, deleting them).
Here are seven tips for making your financial reports more engaging.
1. Close the books and issue financial reports each month
Financial reports are meant to give your leaders the information they need to make decisions about operations. These decisions may range from whether to give the receptionist a raise to whether or not to open a new location. Every decision has a cost, and decision makers need financial reports to know whether the cost is affordable. But your entity’s financial situation can change quickly, so you should close the books and then issue the report no later than four weeks after the end of the month.
Closing simply means finalizing the information by cutting off transaction entry and making all the necessary accrual (non-cash) entries for the month. If you don’t finalize the information, you risk the possibility of reporting different results for the same time period from one report to the next. This will quickly erode confidence in the accuracy and usefulness of the reports. The larger the organization, the more resources it can bring to bear on transaction entry and the faster it should be able to close. A $1 million community group may have limited personnel and need four weeks to close the month, while a large university may only need a few days.
2. Use multidimensional accounting software to gain efficiency
A dimensional chart of accounts structure creates a separate field in your database for each bit of expense information rather than cramming all the information into one account code field. This means you can easily create reports with only the information you want (such as expenses charged to a particular grant) rather than having to manually review a list of transactions and select the relevant expenses.
Dimensions are an efficient way of organizing each bit of information you capture for each expense (such as function, location, program, or funder). The more information you capture, the more you need dimensions. Dimensions also enable your accounting software to run faster by streamlining the chart of accounts.
3. Highlight key performance indicators
An easy way to add value to your financial reports is to highlight key information. Your audience is busy and will appreciate reports that save them time. Analyze the numbers for them and summarize trends with a brief narrative or visual, dashboard-style presentation. Common dashboard components include pie charts, thermometers, and red/yellow/green traffic light-style graphics. If you have it, take advantage of the dashboard creation capability built into many accounting software packages.
4. Create custom reports for each audience
Another customization strategy is to omit information that is not relevant to the reader. A standard report distributed across the organization is likely to have information that is relevant to some, but not everyone. Make your reports more relevant by creating a unique version for each type of user. For example, send department managers reports that include only information about their department.
You can also vary the level of detail by user. The board of directors needs only the big picture to ensure that the organization is sustainable, while the finance committee needs to know more to assess the business plan. The executive director needs even more information to determine whether managers are achieving their goals. For the board of directors you may be able to send only the dashboard, while the finance committee gets a complete set of financial statements and the executive director gets a profit and loss by program.
5. Provide a basis for comparison
You’ve heard that the nonprofit next door had a surplus of $1 million last year. That sounds great, right? Well, that surplus may or may not be great, depending on the context. If the organization had a deficit the previous year, a $1 million surplus truly is a reason to celebrate. But if that same organization had a $10 million surplus the previous year, a surplus of only $1 million may be cause for concern. Similarly, the implication of a $1 million surplus is different if the organization budgeted for a $100,000 surplus than if it budgeted for a $2 million surplus.
In financial reporting, context is provided by comparison to the prior year performance, to budget, or to both. The most useful financial report calculates the variance, or difference, between the reported data and the comparative data in both dollars and percent. That way, readers can get an idea of the magnitude of the change. Include the most significant variances in the highlighted key information (see tip 3). Additional nuance can be added by expanding the comparison across multiple years or multiple budget versions.
6. Include a statement of financial position (balance sheet)
Financial sustainability is one of the top concerns of trustees who have fiduciary responsibility for an organization. Can you pay all of your bills and are you likely to continue to be able to pay your bills? Every organization pays its bills with cash, and the amount of cash on hand is found in the statement of financial position (balance sheet), not the statement of activities (income statement or profit and loss). That’s why financial reports should always include a balance sheet to assess sustainability.
Key information on a balance sheet includes how cash compares to current liabilities (the quick ratio) and how assets that can be easily converted to cash compare to current liabilities (the current ratio). A ratio greater than one indicates that there are enough resources to meet obligations. A ratio less than one suggests that the organization is struggling to pay its bills, or is likely to begin struggling soon unless action is taken to improve cash balances.
7. Develop a relationship with your audience
Many accounting software packages allow you to automatically email reports to managers. This feature, while convenient, should not replace human interaction. Meet with managers to review the reports and answer their questions. Many leaders are not confident in their ability to process financial information. A monthly meeting is a great way teach them the connection between their numbers and the organizational mission, build a mutually trusting relationship, and get valuable feedback for further improving the reports.
How we can help
Critical decisions about the future of your organization may be waiting on complete and reliable financial information delivered in a format that is understandable and useful. CLA’s nonprofit professionals are ready to help you use technology, outsourced accounting services, and other nonprofit resources to better engage your stakeholders in the work of your organization.