5 Ways Nonprofits Can Use Financials to Increase Transparency
Even if you’re not the one in your household who pays the electric bill, checks your bank statements, or transfers the money into savings, you are still invested in the financial health of your family. How money is spent affects you and you’re therefore conscious of the financial impact your actions make.
The same mentality should apply in the nonprofit world. Oftentimes, stakeholders are so far removed from the budget and the balance sheet that they may have no clue how the organization is doing, or they only give the financial statements a cursory review without going deeper. They’re likely devoting every bit of energy to the cause or busy in their day-to-day that there’s no time left to dig deeper and do the research on the organization’s financial health.
The Benefits of Financial Transparency
- Increased Engagement. It’s important for organizations to be transparent about their financials and ensure all stakeholders, including donors, board, staff, and volunteers, understand the numbers. Transparency breeds ownership. When the people who care about your organization understand more about the financial foundation of the organization, they feel a bit more responsible for their small piece of the pie than before. When they feel a greater sense of ownership and responsibility, they will ultimately become more engaged. They’ll stay involved longer and make a deeper commitment when they understand how their work impacts the big picture.
- Increased Contributions. GuideStar published a study that showed “transparent nonprofits received 53% more in contributions” than less transparent organizations. This study of 6,300 organizations showed that those who shared more than just the basic 990 on GuideStar and earned their GuideStar Seal of Transparency earned more the following year. If your organization isn’t being more transparent, you are giving other organizations the opportunity to attract your potential donors.
- Improved Donor Relationships. Going above and beyond the basic 990 and audited financials and sharing more intimate details about your organization’s financial health will help to improve donor stewardship and relationships. According to this article on npENGAGE, building trust and open relationships with donors can help retain ongoing support.
5 Ways to Use Financials to Increase Transparency
Many nonprofit leaders understand the benefits of transparency but don’t know how to share relevant information about their numbers. They may not be comfortable speaking confidently about financials or know what to share. Here are five actionable steps you can take to share your financials and impact on a deeper level with your stakeholders, even if you’re not a “numbers person.”
- Share financials with your staff. The more transparent we are about our numbers to the entire team, the more accountable they will feel towards their own small budget. When making decisions on buying supplies for their program or talking about the organization at a donor visit, they’ll think about the big picture because they actually understand it. Present a one-page financial dashboard or overview of the financial statements with a couple of relevant bullet points such as gross and net revenue from your latest event, a new grant you received for a specific program, or why you missed your revenue goal last month at your monthly staff meeting to connect the team to the organization’s financial health.
- Use your 990 for greater transparency. The Statement of Program Service Accomplishments on Part III of the 990 is your opportunity to share information about your three largest programs and the amount of money you spent and received for those programs. Many organizations do not include nearly enough detail here; they write “Education Program” or “Girls Empowerment Program” and that’s it. This is a huge missed opportunity. In this section, you have over ten lines for each of the top three program areas, so it’s important to include as much relevant detail and metrics about your programs as possible.
- Calculate metrics from the balance sheet. I love using our existing financial statements to pull new insights to share with stakeholders (board, donors, staff). My favorite metric on the balance sheet is months of cash on hand, which shows how many months your organization could operate if no additional funding came in. I always like to see 3-6 months of cash on hand – this lets me know an organization is strong and sustainable. To calculate this metric, simply divide your current cash balance by your average monthly expenses.
- Share metrics from the income statement. Again, using existing financial statements to share a deeper story is an easy way that leaders can increase transparency. Revenue diversity is an interesting calculation from the income statement that demonstrates how much your organization relies on any one revenue source for funding. There is no right answer on exactly how diverse your revenue sources should be but sharing a simple revenue pie chart with each section representing a revenue stream is an interesting way to increase transparency.
- Enumerate program costs. Simple financial statements don’t tell funders and others exactly how much your programs cost to operate, but sharing this information is another way to increase transparency. A simple calculation would be to take your total program expenses divided by the number of programs (or whatever relevant unit your organization uses). The more accurate calculation would also allocate a portion of administrative expenses into programmatic costs as well.
Transparency in the nonprofit sector is increasingly important for organizations of all sizes and it will serve leaders well to share more about their numbers with all stakeholders, including donors, board, staff, and volunteers. When people understand the organization’s financial health on a deeper level, they will become more engaged and committed to being a part of its success.