Make balance sheets and income statements understandable
A nonprofit organization’s board of directors might include accountants, bankers or investment managers. It also might include business or community leaders with expertise in your nonprofit’s niche or in fundraising, marketing and publicity. How can you best share your organization’s financial results with the board members who aren’t necessarily financial experts?
A statement of financial position (balance sheet) and a statement of activities (income statement) are the two documents that usually represent a nonprofit’s financial situation. But just providing long lists of numbers can have a dizzying effect on readers. Remember, how you present the numbers to the board is just as important as the numbers them- selves. So instead of using a numerical format, employ graphs and pie charts to relay the information. Whether it’s through a bar graph, ratio or some other means, there are effective ways to present financial information to nonfinancial board members.
Here are some suggestions for making it easier for board members to digest your numbers.
A statement of financial position shows an organization’s:
- Assets (cash, accounts receivable, and property and equipment),
- Liabilities (accounts payable and long-term debt), and
- Net assets (with and without donor restrictions on resources).
Using a pie chart to depict assets will show your board at a glance what portion of total assets can quickly be converted to cash (cash equivalents and investments) vs. the portion that can’t (property and equipment).
A statement of activities generally starts with total revenues and support. Then program, management and general expenses, and fundraising costs are deducted to arrive at the overall change in net assets. A bar chart is a good way to present this information. It can compare in a single image current revenues and expenses with those of previous periods. By adjusting the bar graphs on, say, a monthly basis, nonfinancial board members will be able to compare revenues and expenses to the budget on a continuing basis.
Or, suppose you create a pie chart that shows how your annual event was funded last year with money from attendees, sponsors and general funds. This tool can help a board make quicker and better-informed decisions — in this case, guiding them in setting or readjusting their funding expectations this year.
Your annual budget assumes a particular level of revenues and support. If you don’t obtain certain grants — or if you take in less for program services than anticipated — your board will need to revisit anticipated expenses and adjust figures accordingly. A graphic image is one way to call “heads-up” quickly.
How ratios help
As the economy continues to recover from the effects of the COVID-19 pandemic, many organizations have experienced cuts in grants and donor contributions. In response, they’ve had to reduce costs. Comparing ratios for the current year to the prior year can reveal whether these costs have been cut effectively. You can compare management and general costs to total support and revenues; program services to total support and revenues; and fundraising expenses to total support and revenues.
These ratios allow your board to see if your organization’s costs and revenues are in line with its expectations, as expressed, for example, in the budget. Let’s say that your management and general costs are $100,000 for the coming year and the total support and revenue for the organization is $1 million. You’d have a highly impressive ratio of 1:10 — 10% of every dollar earned is spent on administrative costs, with the remaining 90% available to fund programs.
To help your board with its financial training, try bringing in outside speakers, such as investment advisors, bankers and accountants. If you have financially savvy individuals on your board who are fairly knowledgeable about reviewing and interpreting financial information, they may be open to sharing their financial expertise with the rest of the board, if asked.