Internal Financial Statements for Nonprofit Organizations

Designing effective financial reports for nonprofit stakeholders

Nonprofit organizations have a variety of stakeholders including the bank, the board of directors, the management team and grantors, just to name a few. In addition to providing financial reports to these stakeholders, reports may be also used by nonprofit organizations to plan and manage risk. Internal financial reports may include reports for grant management, cash flows and budget management. How does internal reporting link to external reporting? How do organizations effectively communicate the finances of the organization to their Board of Directors?

Choosing the appropriate information to share within the financial statements

The first step in designing an effective report is to determine who is your audience. Boards of directors generally serve for a limited time and may have limited financial knowledge, they look at your financial information from time to time, not daily or even weekly, so they may need reminders about your nonprofit organization’s finances and operations. In addition, it makes a difference if the entire board of directors is involved in most things, or if there is a committee structure. If there is an audit or finance committee, they may be focused on operations against budget, long term financial viability of the organization, liquidity and risk management, and compliance. It is helpful to use budget vs. actual comparisons, cash flow projections, accounts receivable aging and net asset roll forward schedules for an audience interested in these types of items. It may also be helpful to establish key performance indicators (KPIs) specific to your organization and show trends and comparisons over time for those KPIs. Some KPIs that generally apply to nonprofit organizations include weeks of operating cash, balances of reserves, percentage of expenses used for programs versus administrative costs, and the current ratio. Of course, it is always important to keep in mind that different committee members may have different backgrounds and the best format and information for reports can vary. Therefore, it is best to have periodic check-ins with your committee members to determine if what is being communicated in the reports you provide includes the information and context the members are seeking.

Internal and external report reconciliation

An additional area to consider is whether your internal financial statements agree to your external audited financial statements and/or Form 990. Some questions to ask include:

• Do your internal financial statements include all components of the organization?
• Are the internal financial statements presented under Generally Accepted Accounting Principles (GAAP)?
• Do the internal financial statements only show the organization itself, but some other related organizations are consolidated in the annual audited financial statements?

If the audit or finance committee reviews internal financial statements throughout the year and then receives and reviews the year-end audited financial statements, it could cause confusion for the committee members if the information presented differs from each other. Therefore, it is a best practice to provide information that connects internal reporting to external reporting.

Some common “reconciling” items between internal and external reporting include:

• Differences in grant reporting (cash basis) versus accrual accounting
• Adjustments that are only made annually, such as recording depreciation, audit adjustments, and consolidation of related entities.

Summary

Three key things to remember when providing reports to stakeholders:

1. Design the report for your audience, making sure to include context to frame the information in the report.
2. Do not overcomplicate the information. Provide reports that are clear, concise and easy to understand. It is best to determine the financial acumen of the intended user so that the information you present is clear. It may even be helpful to put the information into a chart or graph.
3. Make connections between different types of reports and be prepared to explain why they may not all match each other.

Questions on presenting financial reports for the different audiences in your not-for-profit organization? Contact your Not-for-Profit Keiter Opportunity Advisor.