Maintaining accurate and timely financial reporting is one of the key things that a nonprofit organization can do when it comes to financial best practices. But why is accurate and timely financial reporting so important?
We’ve all heard the phrase: “garbage in, garbage out.” The same rationale holds true when it comes to nonprofit financial reporting and financial statements. Stakeholders rely on financial reporting to make important decisions about and for your nonprofit, so if the information isn’t accurate, bad decisions are likely to be made.
In addition, accurate financial information is needed to apply for grants, to comply with funder reporting requirements, to comply with loan covenants and to effectively manage the organization. So, at the end of the day, one of the best financial practices your nonprofit can keep is to maintain accurate and timely financial reporting.
Here, we’ll take a further look into the financial best practices surrounding financial reporting for nonprofit organizations, how they contribute to accurate and timely financial reporting and why it’s all so important.
Financial Best Practices for Nonprofit Organizations
The best practices that lead to accurate and timely financial reporting are never a one-and-done event. They are a continuous process and include:
- Monthly reporting to the Board of Directors
- Annual reporting to the IRS (Form 990)
- Annual reporting to other external stakeholders (audited financial statements, annual program reports, annual reports)
Let’s take a closer look at each of these practices.
Financial Best Practice for Nonprofits #1: Budgeting
The budgeting process is much more than a formality. Budgeting is key among the best financial practices for nonprofit organizations because it sets the bar for an organization’s financial performance.
Budgets should be created in line with a set budget policy, and they should reflect accurate data from the past and present, as well as sound forecasting for the future. But budgeting doesn’t end after the Board of Directors gives its approval. It’s important to continue to monitor your budget-to-actual performance monthly in case you need to make revisions due to unexpected events.
Financial Best Practice for Nonprofits #2: Monthly Reporting to the Board
Providing monthly reports to your Board of Directors is another financial best practice for nonprofit organizations that contributes to accurate and timely financial reporting. It’s best to have your Board review your organization’s financials statements, budget-to-actual reports and any relevant key performance indicators once each month.
Management and the Board of Directors need to be able to review and understand the financial information that is presented to them in order to identify potential problems. This review and understanding is a part of their fiduciary duty.
Potential warning signs that management and the Board should be looking for include:
- Increasing rates of expenditures
- Growing debt balances
- Defaulting on debt obligations
- Continued declines in cash balances
- Borrowing from reserves to pay current expenses
- Continued budget overruns
- Increasing number of employees needed to provide the same services
- Declining investment returns that are disproportionate to trends in investment yields
- Declines in volunteer hours
- Declines in numbers of constituents served
These warning signs may be indicative of a nonprofit organization that is not financially stable and is struggling to maintain its financial independence. They can also be indicative of an organization whose public image is in decline, or whose management is ineffective.
Any and all of these warning signs should be taken seriously by management and the Board.
Financial Best Practice for Nonprofits #3: Annual Reporting to the IRS (Form 990)
One component of financial reporting, and a required financial best practice for nonprofits that is often not given the attention it needs, is the preparation of the Form 990. Making sure that the information on the Form 990 is accurate is essential. The Form 990 is an opportunity for a nonprofit organization to tell its story.
While the IRS is commonly associated with the Form 990 (and rightly so), it’s important to remember that the Form 990 is also used as a resource by many others to learn about an organization.
Watchdog agencies, like Charity Navigator, use the Form 990 to rate charities based on financial health and accountability and transparency. When considering what organizations to donate to, many donors rely on these watchdog agencies, and thereby, the information on the Form 990.
Therefore, if a nonprofit organization isn’t taking the time to make sure the information in its Form 990 is accurate, they may be hurting their overall image in the eyes of donors.
Financial Best Practice for Nonprofits #4: Annual Reporting to External Stakeholders
Accurate financial reporting is also imperative for outside stakeholders, including donors, volunteers and funders.
From a donor’s and volunteer’s standpoint, people want to give their time and treasures to organizations that are financially stable. From a funder’s standpoint, most major funders require organizations to provide some level of financial reporting. From either standpoint, if the financial reporting that is provided is not accurate, organizations can risk both financial and reputational damage.
Financial damage could include donors choosing to donate to another organization, or funders deciding to discontinue funding (or requiring funds to be returned). Reputational damage could occur in situations where inaccurate reporting is a result of fraud, negligence or other misappropriation.
At least once each year, nonprofits should make their audited financial statements, annual program reports and the organization’s annual report available to external stakeholders.
Moving Forward with the Financial Best Practices for Nonprofit Organizations
As you can see, providing accurate and timely financial information is imperative for management and Board members to carry out their fiduciary responsibilities, and to effectively manage the organization.
Further, management and Board members need to understand financial reporting, so they are able to ask appropriate questions, and are able to spot potential warning signs.
At the end of the day, the best practices for nonprofit organizations are the ones that will create timely and accurate financial reporting for your organization, which in turn can fuel your nonprofit to accomplish what matters most—your mission.