Not-for-profit entities are constantly telling their story — whether to raise funds, recruit talent or comply with regulatory requirements. Financial information often makes up a large portion of that story, but nonfinancial information related to the organization’s mission and its impact in the community is often just as relevant, if not more so, depending on the audience.
A 360-degree view of a not-for-profit can be a compelling and valuable asset. The key to maximizing the value of that information is providing the appropriate audience — be it an internal audience such as the board of directors or external, such as a grantor — with the most relevant information. Below offers guidelines on reporting the right information to the right audiences.
External Reporting: 3 Opportunities to Help Tell Your Story to Grantors and Other Key Stakeholders
External reporting for not-for-profit entities can be challenging, as it often comes with many restrictions in the form and content of information presented. The prime examples of external reporting are audited financial statements and IRS Form 990. These two vehicles for communicating information, while robust and often excellent resources for third parties, have limitations in terms of what is reported and how information is shown. More specifically, it can be hard to add color or context to such regulated reports.
The key to effective external reporting is balance. You must meet the report user’s requirements while adding context and perspective, when permissible. The proper balance of the two can tell more of an entity’s story by adding management’s analysis of the raw information.
Management Discussion and Analysis. GAAP financial statements have fairly specific form and content requirements, but a management discussion and analysis (MD&A) narrative can accompany financial statements (be it in a board packet or request for funding) and add information about why the numbers appear the way they do, as well as the entity’s plans for the future to either capitalize on positive momentum or address problems that are hurting performance. Financial statements are largely a snapshot of a period in time, and if a funding entity or regulator needs to know more than that snapshot can tell, an MD&A section can add the necessary perspective. Additionally, this narrative allows for visual tools like graphs or charts, which can often make a faster and deeper impact on a reader than the raw numbers or narratives that can accompany them. Anything accompanying audited financials, however, must be presented to the audit firm before distribution so that the firm can read it to ensure consistency with the financial statements.
GAAP Financial Statement Footnotes. Even within the stricter format of GAAP financial statements or IRS forms, there are areas of flexibility that allow for different types of reporting. For instance, most financial statements include a footnote discussing the nature and operations of the entity. That footnote can easily include nonfinancial metrics, such as the number of people served under the entity’s programs or other measurable forms of the entity’s impact in its community (as long as those numbers are able to be audited). These metrics can help tell the story of an organization’s true impact better than traditional financial ratios might, such us the ratio of programmatic expenses to total expenses.
Presentation of Financial Statements. The new disclosures regarding liquidity and availability under the Financial Accounting Standards Board’s ASU 2016-14 - Presentation of Financial Statements of Not-for-Profit Entities allow for a variety of forms to show how the entity manages its liquidity. The qualitative section of that disclosure allows management to use its own words to discuss future plans for funding and cash management.
>> Read “ASU 2016-14 – Part I: Five Areas of Not-for-Profit Financial Reporting That Will Be Impacted”
>> Read “ASU 2016-14 – Part II: Implementation Strategies to Help Not-for-Profits Prepare”
Internal Reporting: 5 Opportunities to Communicate with Your Board and Management
Internal reporting for not-for-profit entities deals less with compliance and more with answering common questions from upper management and your board. They require forward looking information to help them guide the operations and long-term vision of the organization. Generally, there are three common financial questions to address:
What is the current state of our operations?
What is our long-term potential to expand?
What is the risk of a short-term cash crisis?
The new liquidity and availability disclosures required for GAAP financial statements will help provide some of this information. However, your internal report will likely blend financial data with mission-related information. Financial stewardship is a key charge of the leaders of a not-for-profit entity, but so is effectively fulfilling the mission. When reporting internally, try to include as much of the following as possible:
Specific metrics and key performance indicators (KPIs) that combine impact/outcomes and financial information. These allow not-for-profit entity leaders to obtain a more comprehensive view of the organization’s operations (and how effectively the entity’s dollars are being used to fulfill the mission). A few of the common metrics include ratio of individuals served to staff size, program expense ratio, fundraising expense ratio and expendable net assets to total expense.
Schedules and reports per individual fund. Providing this format of information will help drive decisions regarding allocation of resources among different programs. Since internal reporting allows a level of detail usually too complex or cumbersome for external reporting, this granular level of information allows for maximum visibility.
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Comparative information. For example, you may provide a year-over-year comparison, which helps show trends in the organization and how recent changes in strategy impacted outcomes.
Cash flow and liquidity information. Cash management is a perpetual concern for almost all not-for-profit entities.
Reports and analysis drawn from big data. With the rapid growth of data analytics in all industries, more and more industry KPIs are available. New data visualization tools are constantly coming to market that allow management to glean new insights from their raw data. An organization that can be on the forefront of data visualization improves its chances to adapt quickly and make the best decisions, both in the short-term and long-term.
It’s important to also keep in mind not all board members and upper management are as financially literate as others, so be sure to distill whatever information you provide into a form everyone can understand.
Explore All of Your Options
It’s clear internal and external reporting play an important role in a not-for-profit’s success. External reporting is much more restrictive, but opportunities exist to add information beyond the prescribed formula. Internal reporting, on the other hand, has a wide breadth of options and possibilities. The challenge is to determine what you need from a reporting perspective to accomplish your goals, and how to improve on what you’re already doing.
It is up to an organization’s management to find the best tools and metrics to allow decision makers to guide the organization down the best path and to help outside audiences obtain the information they need.
Please contact a member of your service team, or contact Adam Schultz at firstname.lastname@example.org or Marie Brilmyer at email@example.com for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.