Financial transparency is one of the pillars nonprofits are built on. One of the ways they earn and keep trust in their organization is through accountability to their board of directors. This begins with reporting financial information. Also, the public can ask the board for the nonprofit’s financial information. Therefore, if you run a nonprofit organization, you must learn the fundamentals of which financial information to report and how.
In addition, the board needs a good grasp of financials in order to function effectively. They need to know how to plan the short-term and long-range work of the nonprofit.
There are four main categories of reporting financial information to a nonprofit’s board of directors:
When the board reviews financial information they need to know how it relates to the mission. Provide them with the financial reports of the programmed activities, as well as the needs of the organization.
In order to plan the future of the organization, the board needs reports that cover financial projections. These include estimates for new programs and capital expenses. Provide multiple budget scenarios.
When the board takes action in response to problems with the budget or changes in the environment, they need certain financial information. This includes income statements, analysis of the changes, and again, multiple budget scenarios.
This is the most frequent report, as this is the information the public can request. These reports provide accountability for the organization. They include verification of the IRS 990, an annual review, a balance sheet, and the income statement compared to the budget.
When creating these reports for a board of directors, it’s a good idea to also include a narrative that highlights items that stand out. Similarly, explain any major discrepancies. Visual aids such as pie charts may help board members and those in the public who want to keep up with the organization’s financial information.
In general, the more clearly you report the necessary information, the more easily the board of directors to ensure that the nonprofit is readily accountable to their investors and the public. Additionally, it will aid them in their work to make sure the organization functions in the most efficient possible manner.