Effective nonprofit boards are characterized by active, engaged members who leverage their skills, experience, and networks to guide the organization toward accomplishing its goals. Attaining that high level of effectiveness isn’t luck; it requires hard work and having the right knowledge to steward the organization forward. Much of the knowledge boards need to be successful comes from financial reports. In this article, we’ll explain what financial reports are most useful (if not mandatory) for boards to have.
Why Boards Need Financial Reports
Nonprofit boards are in place to ensure the governance and success of their organizations. Their responsibilities are broad and varied, encompassing legal, financial, and ethical oversight to ensure the nonprofit fulfills its mission effectively, while remaining accountable to its stakeholders and the public. Board members have several legal duties including Duty of Care, which includes the review and oversight of the financial health/wellbeing of the organization.
Financial reports offer clear, measurable analyses of how the organization is performing, in a concise package for board members. These reports provide critical information regarding past progress, current health, and future strategies. More specifically, boards need financial reports for four primary purposes:
- To prove compliance and provide accountability
- To evaluate effectiveness
- To plan for the future
- To take action and react to changes
Main Types of Financial Reports Needed by Boards
Nonprofit boards typically need to review and understand several types of financial reports to ensure the organization is operating efficiently, remains financially healthy, and is fulfilling its mission. These financial reports are crucial for decision-making, planning, and demonstrating accountability to stakeholders.
Here are the main types of financial reports that should be discussed at every board meeting:
- Balance Sheet: Provides a snapshot of the organization's financial health at a specific point in time. It lists assets, liabilities, and net assets, helping the board understand what the organization owns and owes.
- Income Statement: Shows the organization's revenues and expenses over a specific period, such as a fiscal year. It helps the board track financial performance against the budget and see how funds are being used.
- Cash Flow Statement: Outlines the inflows and outflows of cash within the organization, categorizing them into operating, investing, and financing activities. It's essential for understanding the organization's liquidity and cash management.
- Budget Report: Compares the organization's budgeted vs. actual revenues and expenses. It helps the board monitor adherence to the budget, identify variances, and make necessary adjustments.
- Functional Expenses Report: Breaks down expenses by function, such as program services, management, and fundraising. It provides crucial context for understanding how resources are allocated between mission-driven activities and administrative costs.
In addition, once a year the board should review:
- Annual Financial Report: Provides an overview of the organization's financial health, performance, and strategic direction during the previous fiscal year. It presents a broader view of progress and trends than the monthly or quarterly reports, and informs the upcoming year’s strategic vision.
- Audit Report (if required): If the organization undergoes an independent audit, the audit report provides the auditor's opinion on the accuracy and fairness of the financial statements. This report is vital for ensuring compliance with accounting standards and for building trust with donors, grantmakers, and other stakeholders.
- IRS Form 990: Provides a comprehensive overview of the organization's activities, governance, and detailed financial information that’s being submitted to the IRS for tax purposes. The board should understand these and ask questions if there are things they don't understand.
Prepping & Presenting Financial Reports for Nonprofit Boards
Board members are not always financial experts. To help them shoulder their responsibilities successfully, it’s important to present financial reports in a clear, understandable manner. Reports must be designed to communicate information specific to the organization’s current circumstances, in a format that matches the knowledge level and role of board members. Some examples include:
- Always begin presentations by reiterating the organization’s key financial goals and influential factors
- Summarize by category (such as income and expenses) to keep board members focused on big-picture decisions versus daily minutiae.
- Pair qualitative analyses and narratives with quantitative metrics so board members gain context on why there are trends or variances in data.
Regular training and briefings can also help board members become more proficient in reading and interpreting financial reports, so they can make informed decisions for the benefit of the organization.
To get a legal perspective on board communications and financial reporting best practices, contact us.
