To properly manage and oversee a nonprofit organization, the board needs to receive timely and accurate financial information. Since every organization and every board is different, knowing the makeup of the board will provide insight into what is the best approach to providing financial information. Although not everyone on the board will have the financial expertise to decipher detailed financial reports, all board members need to have an understanding of the organization’s financial situation to enable them to make informed decisions. The key is understanding what information will be most useful and how detailed it should be.
Determining What is Essential
While some board members might want only limited financial information, others will want much more detailed information. To strike the right balance, it is important you ask for input from board members. There should be an agreed upon format, which can include budgeted amounts, prior year amounts and current year activity. Presenting total revenues and program expenses over a selected period of time, for example 5 years, might also be beneficial for analysis purposes. Providing information in graphic format (pie charts, bar charts or other visuals) can also make complex financial information easier to understand.
Key Financial Ratios
Depending on the wishes of the board, financial ratios could also be a component of the monthly or quarterly reports. For example, the current ratio (current assets/current liabilities) is a liquidity ratio which is one indicator of the organization’s ability to pay its obligation on time. A ratio of 1:1 or more indicates that, at the measurement date, the organization has enough cash and other assets that can be converted to cash in the next 12 months to pay the obligations due in the next 12 months.
Activity ratios can be used to see how total expenses in various categories (program services, management, general, and fundraising) compare to total support and revenue for the period. Tracking these and other ratios over time can highlight potential problem areas which may need to be addressed.
Focusing on the Big Picture (the Mission of the Organization)
Although detailed financial information, including the organization’s financial statements, should always be available to board members, it is important that the board remains focused on the big picture. Using summarized financial information to help board members understand how the organization’s financial operations fit together to achieve the organization’s mission helps Board members tie everything together. It also may invite discussions on key items including major sources of revenue, needed capital investments, and reserves available for long-term sustainability. This discussion is beneficial for planning long-term viability of the organization.
We Are Here to Help
Communicating financial information that is both accurate and understandable allows board members to engage in meaningful discussions and make informed financial decisions. Please contact us if you need assistance in developing useful financial reports for your nonprofit organization.
I joined Hawkins Ash CPAs accounting and auditing staff in 1987. As a senior manager in the firm’s Manitowoc, WI office, I provide audit services to school districts, municipalities and nonprofit entities. I am a member of the firm’s Governmental Service Group and Nonprofit Service Group.
