Five Minutes for FinancE - REporting
Nonprofit Financial Reporting
In the previous article, we discussed the issues to consider when setting up a nonprofit’s accounting system. The accounting system is the container for all of the organization’s financial data. Moreover, it is the tool that will produce the financial reports. These reports are important to meet regulatory guidelines as well as to support management and governance.
The Heart of Nonprofit Financial Reporting
At its core, nonprofit financial reporting is about transparency and accountability. It’s how organizations tell their story—not just to their supporters, but also to the public, government entities, and potential funders.
Nonprofits produce financial statements that give a snapshot of their financial health. The most common reports include:
Statement of Financial Position (Balance Sheet): This shows what the nonprofit owns (assets) and what it owes (liabilities) at a given moment, helping people see the overall financial standing.
Statement of Activities (Income Statement): This outlines the revenue and expenses over a certain period, illustrating how much money came in and how it was spent. It’s the lifeblood of understanding if the organization is thriving or just scraping by.
Statement of Cash Flows: This report tracks how cash moves in and out, which is vital for ensuring the organization can meet its obligations.
Notes to the Financial Statements: These notes provide additional context and details that help readers better understand the numbers from the financial statements listed above.
These reports are the main components of audited financial statements, which are produced annually. It is common practice for nonprofit organizations to produce interim financial reports more frequently (e.g. monthly or quarterly) to provide important information to management and the Board of Directors about financial performance during the year. In addition to the reports above, interim reports include:
Budget Variance: This shows how the organization is performing in comparison to its budget. Management can analyze significant variances from budget (e.g. actual revenues less than budgeted revenues or actual expenses higher than budgeted expenses) to determine if corrective action is necessary.
Cash Flow Forecast: This shows the anticipated receipt and disbursement of cash and can provide early warning signs of cash shortages to be addressed or cash surpluses to be invested.
Departmental Reports: These break down the standard financial reports to a department-level view, to enable managers to better understand the financial aspects of their activities and to make informed decisions.
IRS Form 990
The IRS Form 990 is a required annual filing for all 501(c)(3) tax-exempt organizations. It is a standard IRS reporting form that condenses all of the information in the reports listed above into a common format and is required to be made public. Examples of Form 990s can be found for listed organizations on the GuideStar website. Many nonprofit organizations utilize a CPA or external accounting firm to help prepare the 990.
Why Financial Reporting Matters
Nonprofits need financial reporting to ensure they’re on the right track. Here are a few reasons why it’s so crucial:
Building Trust: When donors see clear, honest financial reports, they’re more likely to support the organization. Transparency fosters trust, which is the bedrock of any strong relationship.
Meeting Legal Requirements: Most nonprofits are required to file certain financial documents with the IRS and state authorities.
Making Informed Decisions: Good financial reporting helps nonprofit leaders make strategic decisions about where to allocate resources.
Attracting Funding: Grants and donations often depend on a nonprofit’s financial health. A well-prepared financial report can be the key to unlocking much-needed funds.
Navigating the Process
Creating these reports might seem daunting, but it doesn’t have to be. Many nonprofits start by setting up a simple bookkeeping system. This could be as straightforward as using spreadsheets or employing dedicated accounting software. Regularly tracking income and expenses ensures that when it comes time to prepare reports, the information is all in one place.
Nonprofits might also consider working with a certified accountant or financial advisor, especially as they grow. This partnership can provide invaluable insights and help keep the financial operations responsive to the needs of the organization..
Conclusion
Nonprofit financial reporting is essential for ensuring transparency, accountability, and informed decision-making. By adhering to best practices and focusing on clear communication, nonprofits can enhance their credibility and foster trust with their stakeholders. As the landscape for nonprofits continues to evolve, staying committed to accurate and meaningful financial reporting will be vital for long-term sustainability and mission success.
About this Series
Subsequent articles in this series will cover other topics related to nonprofit financial management. Here is a list of, with links to, previous articles:
About the Author
For over 30 years, Robert Pascual has been a leader in nonprofit financial management as a CFO, consultant, conference speaker and educator. He holds an MBA from the Haas School of Business at the University of California and is the founder and principal of Robert Pascual, MBA LLC. He has worked with small, mid-size, and large nonprofit organizations spanning the fields of education, workforce development, housing, health, philanthropy, social services, media, fiscal sponsorship, nature, and the environment. Each of these organizations has faced both unique and common challenges, some of which are probably similar to ones that you wrestle with.