FINANCIAL REPORTING
Financial Reporting for the Board of Directors
A version of this article was published in the nonprofit accounting academy blog in January of 2022
https://nonprofitaccountingacademy.com/blog/
One of the many challenges of my career as a nonprofit finance director was preparing financial statements for the board of directors—a group of volunteers with diverse backgrounds running the gamut from community leaders who have never seen an income statement to financial executives with far more experience than I could ever hope to have. My job was to make sure that they had the comprehensive, clear, and concise presentations they needed for good decision-making. During my fifteen year tenure with a $20 million human services agency I learned how to present the monthly financial picture in a finely honed four to five-page reporting package.
WHAT DOES THE BOARD NEED?
Savvy board members are concerned about their personal liability and their reputations. Even with officers and directors’ liability insurance, good governance starts with staying out of the newspapers for any reason other than promotion of the nonprofit’s good works. In this spirit, boards always want to know “how are we doing;” “how will we come out at the end of the year;” and “are revenues and expenses following the budget?”
The challenge is to give them the big picture with enough detail to instill confidence that the important information is there. Some basic principles:
· Comparative reporting (variance analysis) is key to the presentation of financial data. A lot of insight can be “wrung out” of comparative reports with explanations for the variances.
· Yes, you do need a balance sheet (exceptions are noted below.)
· A well-crafted narrative illuminates the numbers and provides relevant qualitative information. It will be a lifeline for the numbers-averse members, and other board members when they are pressed for time preparing for the next meeting.
· Distribution of the reporting package at least a few days in advance of board meetings is a must for a well-run nonprofit. Board members cannot be expected to discharge their responsibilities without being given the opportunity to digest the information prior to the meeting. Does every member always study the materials in advance of the meeting? Perhaps not, but the principle should be faithfully adhered to.
THE MONTHLY REPORTING PACKAGE
In a successful financial reporting package information flows from high level to detail so that the reader can get the big picture as quickly as possible. For a monthly financial statement package the order might look like this:
· Narrative
o Consolidated year-to-date (YTD) bottom line with comparison to budget and last month.
o Other critical metrics specific to your organization (tickets sold, Medicaid units billed, meals provided, etc.) with explanations for variances from expectations.
o Updates on programs that have been identified as problem programs in need of close monitoring.
o Updates on critical, ongoing issues.
o Any new information that the board should be aware of.
· Balance Sheet.
· Consolidated comparative budget-to-actual income statement.
· Individual program income statements—either condensed or in detail—that tie out in total to the consolidated income statement.
Narrative
My treasurer was one of those financial types who I found intimidating until I found my feet. He used to say that he wanted to look at the picture from 30,000 feet. He also used to say “I want to know where we are hemorrhaging.” The narrative does this by highlighting the essential points to be gathered from the entire presentation.
The narrative is a good place to provide an update on programs that need special attention. Board members don’t need to study individual program income statements, but they do need to be kept informed about programs that were flagged during the budget approval process as poor performers.
Updates on new trends that may affect the final numbers will avoid surprises at year-end. Metrics provide an alternative way of understanding the activity during the reporting period, and updates on changes in the organization’s operating environment will head off surprises later on.
Balance Sheet
During the course of my career I learned that the balance sheet provides important information that the board should see throughout the year. A treasurer or other financially-oriented board member can quickly scan a well-designed balance sheet to see the agency’s cash position, its receivable and payable balances, and changes in debt and other liabilities. The balance sheet should classify the assets and liabilities as current and noncurrent so that a working capital ratio can be calculated. It should present the balances as of the last day of the reporting period and the balances as of the last day of the prior year. Accounts receivable and payable balances over 60 or 90 days old is useful information to include.
Consolidated Budget-To-Actual Income Statement
Still at a high level, the purpose here is to see the overall picture for the whole agency. The board wants first and foremost to know that agency-wide, revenue is coming in and bills are being paid in accordance with the budget. The budget is the roadmap that the board voted to approve before the year began. This report allows board members to compare actual revenues and expenses to the budget numbers that they are familiar with.
The reader wants to see significant variances in seconds so be careful not to clutter up this report with too many columns. A common presentation is YTD budget, YTD actual, and variance expressed in dollars with explanations for significant variances. Consider adding shading to the variance column.
As the year progresses, some of your actual results will start to diverge from the budget. If the changes are significant the budget will lose relevance and you should consider providing a year-end forecast with your monthly statements.
Individual Program Income Statements
While board members are not expected to examine every line item every month for every program, they should be given reports showing the components of the consolidated numbers. Depending on the size of your organization the individual income statements can be detailed or condensed as long as total revenues, total expenses, and net income tie out to the consolidated statement.
TO CONCLUDE
My treasurer—the 30,000 foot guy— was a busy VP of a large hospital system and needed information to be concise above all else. Other board members might feel differently. You will always walk a tightrope between too much and too little information. I learned through trial and error that even though some board members are afraid of numbers, they all are busy people and easily frustrated by pages of facts and figures that are not necessary but “nice to have.” The tightrope never went away for me, but I did arrive at a point where every board member felt that they could count on me to provide reports that got to the heart of the matter with all relevant facts included.