How to Communicate Your Nonprofit’s Financial Story
Let’s face it; nonprofit financial data has a reputation for being boring and can fill even the most devoted professionals with dread.
To change this perception, nonprofit organizations should create and convey a compelling financial story. The financial story should explain what your organization does with the money. What are the performance goals? What are the program goals? How does money support organizational goals? Once a nonprofit’s story is conveyed, stakeholders can then understand the impact of the organization.
Communicating Your Nonprofit’s Story to the Board
While Board members typically bring a variety of talents and expertise to a nonprofit organization, they do not always have extensive experience with financial and accounting matters. Below are tips to help you communicate your financial story to the Board. The shared information should quickly assess if your nonprofit organization is on track, or if it needs to take corrective action.
The Need to Know
Board members cannot properly perform their functions if they do not obtain and understand information about the organization’s financial position. Without timely financial information, they can neither make informed decisions about goals and planning nor monitor the nonprofit organization’s progress toward those goals. The bottom line, they cannot fulfill their fiduciary responsibilities.
At a minimum, the Board needs to receive the following financial information. They should receive this information in an accurate and timely manner, on a monthly or quarterly basis:
- Statement of financial position (balance sheet)
- Statement of activities (income statement)
- Actual results compared to budget
- Annual performance goals
The Numbers
Before reaching the point of training the Board, a user-friendly format for the financial reports should be developed. Bear in mind, graphs are often easier to understand than columns of numbers and can provide a useful vehicle for sharing trending information.
Similarly, Board members may find it easier to process ratios, which combine two or more pieces of financial data to provide a comprehensive view. For example, fundraising efficiency can be expressed as a ratio that divides contributed income by fundraising expenses.
A narrative section should also be provided along with the numbers. Use the narrative to highlight significant items and explain notable variances between budgeted and actual figures.
Make sure the necessary financial statements are prepared well in advance of Board meetings and distributed to members at least one week before the meeting to give them time for review.
The Dashboard
In recent years, nonprofits have turned to dashboards to convey financial information to their Boards. A dashboard is a one- or two-page snapshot of key performance indicators (KPI). It should be tracked on a monthly basis and presented at each Board meeting. This information should correlate to the annual goals of the organization and indicate if it’s below expectations, meeting expectations, or exceeding expectations. For more on dashboards, visit How Your Nonprofit Can Create Effective Dashboards.
Communicating Your Nonprofit’s Financial Story to Funders
According to Guidestar.com, there are over a million IRS-recognized, tax-exempt organizations in the United States. If you aren’t aware of what Guidestar is, this article can help you get up to speed.
Being able to communicate your financial story to funders is increasingly important in the current competitive market. Below are tips to help communicate your financial story to funders. The shared information should quickly assess if the organization is worth investing in.
The Need to Know About Your Nonprofit
Funders are searching for meaning; they want to get involved in something much bigger than themselves. The financial story must speak directly to their hearts and minds and build trust and transparency. Funders want to know that the money they invest will make an impact and be put to good use.
The financial documents sent to funders can be basic and they may request a particular form. They should receive this information as current as possible to show the financial books are in order and timely.
- Statement of financial position (balance sheet)
- Statement of activities (income statement)
- Specific project budget (may be on funders own form)
- Annual performance goals
Your nonprofit’s numbers
While the financial numbers are important to lend credibility to the organization, the financial story must support the program and mission. If the financial story paints a picture of a lean program focused on cutting costs and not growing, then the program goals should not boast of rapid growth and expanding into new areas. Conversely, if the financial story promotes a healthy financial picture, the program story should not paint a dire picture of cutting programs.
Below details a few numbers that are important to funders when it comes to assessing the health and risk of your organization.
Your Nonprofit Organization’s Program Costs
This means the percentage of functional expenses spent on programs. Generally, unless the organization is applying for an operational grant, funders want to be assured the foundation manages the overhead cost associated with running the nonprofit. Funders want to see that their investment will go toward supporting the program goals. According to Charity.org, 70% of charities spend at least 75% of their budget on programs and services. They suggest any organization spending less than half of its budget on program expenses is simply not living up to their missions. Ideally, funders like to see program expenses at least 80% of the total budget.
Your Nonprofit Organization’s Administrative Costs
This means the percentage of function expenses spent on management. Funders like to see administration expenses lower than 15%.
Your Nonprofit Organization’s Fundraising Costs
This means the percentage of functional expenses spent on fundraising. Ideally, funders like to see fundraising expenses lower than 5%.
Your Nonprofit Organization’s Fundraising Efficiency
This means the amount an organization spends to raise $1. In recent years, this number gained importance in understanding the financial health of an organization. This percentage explains how much effort the nonprofit puts into sustaining the organization and explains how diverse and innovative it is.
Funders may not specifically ask for these numbers as they would basic financial reports; however, be assured they are asking these questions when they review your request for funding. We suggest nonprofits take the opportunity to offer the numbers along with a compelling narrative.
Communicating Your Nonprofit’s Financial Story to Employees
Often, we overlook and forget the employees are also major stakeholders and need to understand the financial story. They need to know the story for their own commitment to the mission as well as the ability to speak on behalf of the organization.
The shared information should quickly assess if the organization is financially viable and how they contribute to the organization’s mission.
The Need to Know
Employees need to know the basic financial numbers of the organization so they can be engaged in the financial story as well as impact the story. Employees want to know what they do makes a difference in achieving the mission goals, but also need to know they impact the financial health of the organization.
When employees know if the organization is looking for fundraising because they are not meeting expectations, they are more likely to keep their ears open for funding opportunities. More importantly, they are likely to tell someone who can do something with the information (namely, Fund Developer or Executive Director).
If employees know that administrative costs have increased, they are more likely to manage their expenses by decreasing the use of office supplies, shopping for discounts, carpooling to meetings, etc.
In conclusion, nonprofits have many different audiences and a solid financial story needs to address them all. It is imperative an organization has their financial story solidified as well as measurable. The organization is going to go through many different phases of growth, but a well thought out financial story shared early, and often, will help keep the mission stable and focused.
If you would like help with your financial story, please contact NFP Partners. For more, visit our Ultimate Guide to Outsourced Nonprofit Accounting.