A nonprofit financial report is a critical document that showcases an organization’s fiscal responsibility, transparency, and impact. A well-crafted piece can help maintain donor trust, ensure regulatory compliance, and aid in effective decision-making by the board and management.
Understanding the Purpose of a Financial Report
The primary objectives of a nonprofit financial report include demonstrating fiscal accountability and transparency to stakeholders. Ensuring compliance with legal and regulatory requirements, facilitating effective decision-making by the board and management, and showcasing the organization’s impact and effectiveness in achieving its mission is equally important.
Components of a Nonprofit Financial Report
Statement of Financial Position
Also known as the balance sheet, this statement provides a snapshot of the organization’s financial health at a specific time. It includes assets, liabilities, and net assets. Assets are resources owned or controlled by the organization, such as cash, investments, property, and equipment. The organization’s liabilities are obligations to others, such as accounts payable, loans, and deferred revenue. Net assets reflect the difference between assets and liabilities, representing the organization’s equity or net worth.
Statement of Activities
This statement, often called the income or profit and loss statement, summarizes the organization’s revenues, expenses, and changes in net assets over a specified period. It’s crucial to segregate this information by the organization’s different revenue sources and expense categories to provide a clear picture of its financial performance.
Statement of Cash Flows
This statement reveals how the organization’s cash position changed during the period. It categorizes cash flows into operating, investing, and financing activities to help stakeholders understand how the organization generates and uses cash.
Statement of Functional Expenses
This statement is unique to nonprofit organizations and provides a detailed breakdown of expenses by function. It typically separates expenses into program services, management and general, and fundraising categories. This breakdown enables stakeholders to assess the organization’s efficiency and effectiveness in allocating resources to accomplish its mission.
Notes to Financial Statements
These explanatory notes supplement the quantitative information in the financial statements and provide additional context and disclosure. Notes may include information about accounting policies, significant transactions, contingencies, and subsequent events.
Best Practices for Creating a Nonprofit Financial Report
To create a compelling and informative financial report, nonprofit organizations should follow these best practices:
Use Clear and Concise Language
Financial reports can be complex, so use straightforward language whenever possible. Avoid jargon, and ensure that every term is well-defined and easily understood by a non-financial audience.
Visualize Data Effectively
Incorporate charts, graphs, and other visual aids to help readers quickly grasp the financial information presented. Providing visual representations can make complex data more accessible and engaging.
Provide Context and Comparisons
Offer context by comparing the organization’s financial performance to previous periods, industry benchmarks, or other relevant metrics. This can help stakeholders better understand the organization’s progress and assess its financial health relative to its peers.
Emphasize Impact and Outcomes
While the financial report’s primary purpose is to present financial data, it should also highlight the organization’s mission-related accomplishments. Include a narrative that connects financial performance to the organization’s impact, demonstrating how resources have been used to further its mission.
Ensure Accuracy and Compliance
Verify the accuracy of all financial data and ensure compliance with regulatory requirements, such as Generally Accepted Accounting Principles (GAAP) and any relevant tax laws. Engaging an independent auditor to review the financial report can enhance credibility and provide stakeholders with additional assurance.