Glen Swanson, TD&T Assurance Manager, provides insight on the different types of financial reports and some of the ways your board can use them to improve your organization’s decision making.
Boards play a vital role for many nonprofit organizations, including financial oversight. Review of financial reports should be a key agenda item at every board meeting. The type of reports used can and should be altered based on the changing needs of the organization.
There are countless types of financial reports; the usefulness of a report will depend on the circumstances and purpose. Following are four broad categories which reports can be broken into:
Compliance and Informational
What have we already done? These reports take a historical view to provide information on how financial resources have been used; to ensure the effectiveness of operational controls, and to provide transparency to stakeholders. Traditional financial statements such as the statement of financial position (balance sheet) and statement of activities (income statement) would fall into this category, as well as a review of an annual audit and form 990. The board should receive reports in this category at every board meeting – to help ensure they understand how funds are utilized.
How are we doing? These reports take an ongoing look at the financials to measure progress toward organizational goals, assess the effectiveness of activities, review administrative systems, and consider financial information about programmatic goals. Budget to actual comparisons are a key evaluation report. Other examples of reports would include cash flow projections, financial reports on key programs of the organization, and financial & programmatic benchmarks (key ratios, reserve levels, costs of providing services, etc.). Evaluation reports should also be reviewed at most board meetings, to help identify any potential concerns as soon as possible.
Where do we want to take the organization? With a futuristic view, these reports consider current trends, changes in the operating environment, and opportunities for change to help plan for the coming years. A trend analysis of key revenues & expenses for recent years can give insights on what to expect going forward. Reports on changes in the operating environment, such as projected changes in available donors or demand for services provided will aid consideration on if operations need to change. If a board is considering a significant change to operations or programmatic offerings, management should provide multiple budgets scenarios based on the different options under consideration. Planning reports will heavily used when establishing a budget for the coming year or when there are major changes in the operating environment.
What do we do? Reports in this category will help a board respond to unexpected changes and opportunities. Whether they be positive or negative, a board needs to know of changes or opportunities to be able to act on them. Budget to actual analysis will help to identify areas of concern, but digging into the causes of variances will show opportunities for change. Reports that get at the underlying reasons for any problems with cash flows, budgets, or programs should be analyzed whenever concern Likewise, if an organization finds itself with excess cash flows, an analysis should be performed to determine if the funds can be utilized or if they need to be held for the future. Any time the board needs to make a financial decision which strays from the planned operations, these types of reports should be provided.
A board should be accustomed to seeing reports from all the categories above – each type has its purpose in a board meeting. Whatever the type of reports given, it’s important that they be accurate, timely, and understandable. Financial oversight and decisions will only be as good as the information received by the board.
Call TD&T CPAs and Advisors if your organization is struggling to find the right types of reports to provide or needs assistance preparing the reports. We work with nonprofits of varying sizes and attend national conferences on nonprofit financial management – we’ll work with you to find the right solution to provide the board with the reports they need.