Using Your Financial Statements to Tell Your Story
A lot of organizations get audits because they are required to, by a funder, or the state, or their bylaws. While audited financial statements are necessary for these purposes, at their best, they can serve to help you market your organization and show your value to potential funders.
Here are some ways to make your financial statements more user-friendly and turn them into a useful tool in telling your organization’s story:
Customize the revenue and expense categories.
The financial statements should be most useful to the readers that matter the most. If you have one or two major funders, consider conforming the revenue and expense categories to the line items in the monitoring reports they use so they can easily see how their activities support the operations overall. You may also want to line up your categories with a common reporting form, like the Form 990 or the Maryland State Arts Council reporting forms.
You may also want to look at the categories in your financials to see if they can be streamlined. If you have $1 million in expenses, does it make sense to disclose $750 in dues and subscriptions but group together $200,000 in consulting? This too is part of telling your story, making sure the readers of your financials focus on the most important parts of your finances instead of being distracted with minutia.
Show your impact – every year.
The most interesting financial statements share customized performance information for each year – instead of saying you provide activities for at-risk youth, talk about the specific impact of those activities for each fiscal year presented. How many kids did you help? How did you measure the impact? What new activities did you start, and what is the benefit? The most dynamic organizations make a point of reflecting how they grow and change each year to provide more comprehensive and effective services to their constituents.
If you are using your financials for fundraising, make sure that you’re not just using the default/minimum required language, but truly looking at the categories you’re presenting for items like restricted net assets, contributions, and program/supporting service groupings. If you have relatively few restricted categories, take the time to describe them to really help the reader understand why donors have set aside this money and how you’re planning to use it.
Look at the revenue and expense categories and how they interact with the types of funders you’re soliciting. If you have three major programs, present your program expenses in those three programs instead of in one total number to better show each activity’s impact on the whole. If it’s important to show broad public support, revisit your revenue categories to show government grants vs. corporate contributions vs. individual contributions instead of a lump sum “grants and contributions” line.
Reporting on inkind is key to showing your community’s support.
While there are very specific rules (set up link to separate article on those rules) for when and how you can capture inkind services in your income statement, you can report all inkind hours – whether or not they meet the GAAP rules – in your footnotes. A donor is generally going to be more interested in giving to a nonprofit that says they receive 2,000 volunteer hours, or $75,000 in donated services which don’t meet the rules for recording as revenue, vs. the one that says nothing about volunteers and their support.
Remember also that inkind can be more than just services – if you’re getting space free of charge on a regular basis, or if you’re getting donations of goods, furniture, food, or clothing, that can and should be valued in your financial statements.
Expense allocation is key to telling your story.
One of the most critical factors funders will look at in your financials is the percentage of your expenses that are spent on program vs. on supporting functions like management, fundraising, or membership services. There’s some specific guidance out there but generally, an allocation that is reasonable and consistent is allowable. Generally, we are more likely to see organizations being too conservative with this allocation instead of too aggressive. If your Executive Director is spending time directly supervising program staff, that’s program time. If your Office Manager is answering calls about program events or scheduling members for program activity, that’s program expense. And if your fundraiser is instrumental in putting together the annual report, that time is administrative, not fundraising. This is a topic we’ll return to in later posts because it’s one of the most important ideas in nonprofit accounting.
If you’re a funder of nonprofits, reach out and share with our audience what resonates with you when you’re reading audited financial statements. And if you’re a nonprofit who wants to share ideas that have worked for your financials, your peers will welcome that information.