Are Your Financials Telling the Right Story? Six Tips to Keep Your Agency’s Financial Reports from Tanking Your Fundraising Efforts

Did you know that your financial reports tell an important story about the sustainability, efficiency and effectiveness of your organization?

You heard it right! When funders are reviewing your organizational budget, balance sheet, statement of activities, IRS Form 990 and financial audit, they’re on a mission to uncover critical information about your nonprofit.  

In my book, Become a Nonprofit Pro: 9 Common Pitfalls and How to Avoid Them, I guide you through each of these documents and what they reveal about your organization. Each piece of financial information paints a vivid picture of your organization’s fiscal health. Read on for six key takeaways.

Tip #1: Craft a Budget that Reflects Thoughtful Planning

Unlike their for-profit counterparts, nonprofit organizational budgets are static blueprints of intention and foresight. Board-approved at the beginning of the fiscal year, an organizational budget charts a course for the financial management and sustainability of your mission. A well-crafted budget rooted in realistic revenue projections showcases fiscal responsibility — a trait funders expect to see.

What does it truly cost to run your organization? Staffing, in-kind support and outreach — each expense tells a story of dedication and impact. I always recommend that you develop the revenue side of your budget first to avoid the pitfall of inflating expenses and making unrealistic projections that lead to deficit spending and financial instability. When determining your budgeted revenue figures, use historical revenue as a starting point and then determine an appropriate revenue increase for each strategy (usually 5-15 percent is reasonable).

When you don’t have historical revenue as a starting point, back into your goals by creating a fundraising plan that is reasonable and realistic based on your organization’s fundraising capacity, history and skills. For instance, if you plan to implement a friends-asking-friends fundraising strategy with your board members, you could determine a fundraising goal for this strategy in this way:

10 board members X $1,000 goal for each one = $10,000 total revenue projection to enter into your budget

The important takeaway is that your budgeted revenue projections are based on a strategy that you can explain and realistically achieve. If you create your budget by plugging in all of your wish list expenses first then plugging in the revenue figures you need to meet those expenses, you are much more likely to create an inflated budget that is not achievable. Your budget must be reasonable.

When building an organizational budget for the first time, use your general ledger and profit-and-loss statement from the last fiscal year as a starting point to determine realistic expense figures. When budgeting for expenses, meticulously account for every penny to paint a clear picture of your operational needs. This is particularly important if you are building a budget from scratch or you are building a growth budget. Funders will review it to determine whether you have considered all possible expenses. They want to know whether you understand what it will cost to run the organization.

It is really important that your budget includes all of the costs associated with operating effectively and that includes in-kind expenses. In a start-up organization, often staffing or other services is provided pro bono. If that is the case, include the value of those in-kind services in your budget. (In-kind hits the budget as a revenue and expense line item.) This is especially important if you hope to have those expenses funded someday. Remember, your organizational budget should tell the story of what it costs to operate.

Check out our simple budget template and embark on the journey of crafting your financial roadmap. 

Tip #2: Your Board is Fiscally Responsible for Your Nonprofit

In the story of nonprofit financials, the board of directors assumes a pivotal role — one of accountability and stewardship. Charged with approving the annual organizational budget, reviewing financial statements and upholding financial integrity, the board safeguards the organization’s financial health and sustainability. Failure to fulfill these duties can spell disaster, as mismanagement of funds can jeopardize grant funding and tarnish the organization’s reputation.

Ensure that board members can perform their legal duties and obligations by making sure they understand the budget and how to interpret the organization’s other financial reports. Once a budget is approved by the board at the beginning of the fiscal year, it does not change again without board vote and approval.

Tip #3: Get Right with Your Monthly Financial Reports

In addition to a budget-versus-actuals report, a nonprofit’s leadership should be reviewing, at minimum, two additional reports monthly. Profit-and-loss statements and balance sheets provide important real-time information needed to guide an organization’s financial management. The profit-and-loss statement (also referred to as a statement of activities) provides insight into the diversity of revenue streams, expense management and whether your revenue is coming in as expected. Funders scrutinize this report to determine whether the organization is tracking toward meeting budgeted revenue and expenses. They are looking for clues that speak to the organization’s financial management, stability and long-term viability.

The balance sheet provides a snapshot of a nonprofit’s current financial position, detailing its assets, liabilities and equity. This report is instrumental for funders to gauge the organization’s financial health and assess its reserves (or cash on hand). For instance, if an organization has an annual expense budget of $120,000, dividing this by 12 gives an average monthly spend of $10,000. By dividing the cash balance on the balance sheet by this figure, funders can determine the number of months of reserves available. Typically, nonprofits aim to maintain a minimum of six months of cash reserves but should not exceed 18 months. Having less than six months in reserves may raise concerns about financial risk, while having high reserves may suggest the organization doesn’t need additional funding. It is crucial for organizations to strike a balance and consider investment strategies for surplus funds or future capital needs.

When sharing these reports with funders, proactively explain any discrepancies, like pending donations impacting cash flow timing or any indication of deficit spending.

Tip #4: Make Sure Your CPA Knows How to Fill Out the Form 990

The IRS Form 990 serves as a transparency and accountability tool within the nonprofit sector. This public document is readily available to donors through sites like GuideStar and exposes the organization’s financial management, revenue sources, expense ratios and executive compensation. It is important that your certified public accountant (CPA) understands nonprofit accounting and accurately categorizes expenses on Form 990, Section IX. This is a very common mistake that we see with nonprofits utilizing pro bono or CPAs who are less familiar with the Form 990. Even if your organization, like a ministry designated as a church entity, isn’t required to file, we strongly advise completing one anyway (without the need for IRS submission). Sharing these on platforms like GuideStar and your website offers transparency to potential grant funders who typically review such financial information. This gesture demonstrates a commitment to transparency, which donors greatly value.  

It is worth noting that compensating board members of public charities is uncommon. Funders may review staff salaries and whether your board receives compensation (information readily available on your 990) to evaluate how you spend donor dollars.

Tip #5: When It’s Time to Audit Your Financials, Do It

If you are aiming for significant grant funding, we strongly encourage you to perform an annual financial audit once your organizational revenue exceeds $250,000. An audit, conducted by a CPA, offers an analysis and verification of your organization’s financial activities over the fiscal year. Major funders often require audits. It reflects a commitment to financial integrity and sustainability.

Organizations seeking limited grant funding that doesn’t require an audit may opt for a financial statement review, providing limited assurance on financial statements’ conformity with accounting standards. Both audits and reviews enhance credibility and stakeholder confidence in your organization’s financial integrity.

If your audit has findings and you receive a management letter, it is important to respond with a plan for corrective action, demonstrating a commitment to addressing financial concerns. Funders may excuse initial issues but expect accountability (and loss of funding) for recurring problems.

Tip #6: Crafting a Compelling Narrative

Your financial documents are chapters in the narrative of your story of impact and stewardship. By crafting budgets rooted in foresight, embracing transparency in financial reporting and upholding integrity in audits, nonprofits can weave a compelling account of sustainability and efficiency — one that resonates with donors, funders and the community at large. In the realm of nonprofit financials, let your story be one of prudence, resilience and unwavering commitment to your mission.