To properly oversee and manage a nonprofit organization, its board members need to receive accurate and timely information about the organization’s finances. But which financial information will be most helpful, and how detailed should it be?
There is no single best approach. Much depends on the makeup of the board. In many organizations, not every board member has the necessary financial expertise to decipher complex financial reports. At the same time, informed decision-making and planning require a good understanding of the organization’s financial situation.
Determining What’s Essential
To help focus the effort, management and the board should determine the specific types of financial information to be reviewed on a monthly or quarterly basis. Among other items, essential information typically would include a comparison of the organization’s actual revenues and expenses to prior results and to the budget, with variances noted in both dollars and percentages. A look at longer term trends in key areas, such as total revenues and program expenses, can also be useful for analysis purposes.
Looking at Ratios
The board also may be interested in reviewing key financial ratios. For example, the current ratio is a measure of liquidity (the organization’s ability to pay its obligations on time). A ratio of 1:1 or more indicates that as of the measurement date, the organization has enough cash and other assets that can be converted into cash in the next 12 months to cover the liabilities that will come due in the next 12 months.
As for activity measures, it’s useful to see how total expenses in different categories — management and general, program services, and fundraising — compare with total support and revenue for the period. Tracking these and other ratios over time can highlight potential problems that may need to be addressed.
Focusing on the Big Picture
Detailed financial information, including the organization’s financial statements, should always be made available to the board. But for many purposes, summarized information is more accessible and can help keep the board’s focus on big picture issues.
Board members may also appreciate seeing certain information presented in graphic format. Pie charts, bar charts, and other visuals, as appropriate, can make complex financial information easier to digest. Including explanatory text where necessary can also help board members put financial data in context and interpret the numbers.
Call on Us
Communicating up-to-date financial information that is both accurate and understandable allows board members to engage in meaningful discussions and make informed financial decisions. For assistance in developing useful financial metrics and reports for your nonprofit organization, please don’t hesitate to contact us at (847) 267-9600.