Balancing the Mission Checkbook

If you’ve ever felt that your executive director, program managers, and board members just don’t “get it” when you talk about financial reports, maybe it’s because you gave them the wrong information. I don’t mean that you are using inaccurate financial reports, but that you may be providing the wrong information all together. There is no such thing as one size fits all in financial reports, but most of the advice and guidance on nonprofit financial reports cover the same generic materials – how to read a balance sheet, income statement and audit. Does this mean that reading a financial report is the best preparation for financial decisions? Is that what you need the executive director, program manager and board members to do – to understand how to read the report? Or do you need them to know how to use the information to develop plans, monitor progress and make decisions? If you want the latter, then you need to take a look at what financial information is provided and how it’s provided.

I think there are six distinct steps in using financial information well. Each step is necessary and follows a clear sequence.

1. Produce accurate reports
2. Understand the information
3. Analyze the information through variance review, comparisons and ratio analysis
4. Interpret the information in the context of the organization’s situation, plans and goals
5. Communicate the information
6. Use the information for decisions and planning

Think about how your organization uses financial information – most of us jump directly from step one to step six. Without discounting the importance of the first two steps (a big accomplishment for most small nonprofits), the analysis, interpretation and communication are essential for really wise decisions. So who should be responsible for these different parts of the process? Are you expecting your board members and program managers to complete their own analysis and interpretation? I shared this concept with a CFO the other day and he stopped suddenly and said “what you’re saying is there is a difference between data and information”. Yes – the financial staff should strive to provide valuable information, not just accurate data. Ideally, the financial staff is responsible for the first three steps, and the fourth and fifth are completed in coordination with management and program staff.

If you take the time to really evaluate how you provide and use financial information – and diagram these six steps – you can easily create a better process for providing exactly the financial information needed for the organization. For a longer article about how boards need to use financial information, read Reporting Financial Information to the Board from the Nonprofits Assistance Fund’s financial management resource library.