Financial Reporting to the Organization
By now, it should be very clear that a large amount of effort involved with forming and operating a nonprofit organization centers on money. Not only is money going to be necessary to fulfill your mission and do all the things in the community you set out to do, money will also be necessary to run the organization.
Even when there are enough funds for both the internal operations and external programming of your organization, money will become the largest source of unnecessary strife if the organization is lacking a clear financial-reporting system.
The IRS has specific requirements for what must be included in the annual financial report, Form 990. Because every organization operating with a federally recognized tax exemption must file this form, structure your bookkeeping from the beginning to make reporting easier. Although you may not need the detail required in the form for every internal report, it is easier to delete something than to create required documents when you are busy with other tasks.
Covering all of the requirements for setting up your bookkeeping and the financial-reporting requirements for a nonprofit organization would require an entire book. The intention of presenting this information is to get your organization set up and on the right track. Once you are established, seek the advice of a tax specialist to see precisely what your group needs to do to remain in compliance.
Regardless of who will ultimately be receiving your financial reports, make sure the basics are covered. Your main accounting must include:
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A basic income/revenue statement, with categories for salaries or consultant fees, office/postage expenses, and revenue specified in general terms
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A balance sheet, identifying particular categories such as accounts receivable and cash on hand
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A statement of earmarked expenses, in which your expenses are clearly allocated to program services (what you “do”), fundraising, operations, or the internal details of actually running the organization
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A statement of expenses broken out by the actual program service such as educational mailings, a field trip, or a public lecture
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A support schedule that describes your organization's sources of revenue, such as charitable donations, membership fees, or investment income
The financial report for the board meeting is a quick overview or snapshot of the health of the organization. It needs to have enough detail to give board members a clear sense of the current situation, but it does not need to be the entire operating budget.
While most reporting will not call for this level of detail, the IRS requires it. It makes sense to design your entire financial environment to meet the most stringent requirements you will face. You can always skip unneeded details.
Reporting to the Board
To maintain its legally required oversight, the board needs to be fully engaged and up-to-date on the financial health of the organization at all times. At every board meeting there must be an accurate financial report from the treasurer or that person's designate. A report to the board does not have to be all-inclusive, unless a full accounting is requested. Rather, at a minimum, the financial report needs to outline current cash on hand, current and known liabilities, and all expenses expected to come due in the next month. The expenses certainly can be fully itemized, but they do not need to be unless specifically requested.
If the organization owns stock or other investments, include a report on their status. The whole purpose of the report to the board is to keep everyone current on the finances and provide the opportunity to have necessary discussions. Development of this monthly report should be the financial committee's ongoing responsibility.
While it is best to consult your attorney for advice specific to your situation, consider keeping confidential any financial details surrounding current or potential litigation, real-estate transactions, or employment (other than general salary information). Details of these matters should only be available to board members and whomever they designate, such as senior staff.
However, a looming problem or a situation that may become a serious problem may call for a complete discussion beyond the brief report and may warrant an adjustment to the agenda.
Reporting to the Staff and Membership
Be certain the organization's financial status is accurately explained to paid and volunteer staff as well as to the membership. Nothing can create general lack of trust throughout the organization faster than a feeling that the board is not operating in a transparent manner regarding financial reporting. Other than the parts of your budget that require confidentiality, the best option is to make your finances as open as practical.
Allowing anyone to review the budget to satisfy any questions they might have will quickly eliminate lingering concerns over how funds are spent. A small notice in your printed newsletter or on your website indicating that people are welcome, with advance notice, to review the budgets or other corporate documents will help establish the organization as open and its inner workings as transparent. People do not like thinking there are secrets, so taking the extra step to open your process will reduce issues before they occur.
