Monday, August 23, 2010

How To Create A Nonprofit Annual Report

A nonprofit's annual report is: excellent public relations and marketing (as long as the report is disseminated, correct, the truth, and complete); communicating actual information with current and potential donors, so an excellent fundraising tool; remaining in compliance; a regularly conducted practical exercise that can improve the organization's cash flow and financial growth; a professional best practice (in both the nonprofit and accounting fields); and today, necessary.  Most nonprofits that compile an annual report, annually, are demonstrating their professionalism, ability to manage their organization such that it succeeds and grows, and instills confidence.  A nonprofit that knows to annually produce this report and mails it out to its current donors and any potential donors (or anyone else who simply requests it) is demonstrating that they know that reporting actual income and actual expense for the year, plus any other pertinent information i.e. a list of the year's major donors (whatever the definition is of a major donor for that individual nonprofit); a list of the core mission related accomplishments for the year; any accolades, awards, or official recognition for the organization's excellence received from an entity not affiliated to the organization; listing the organization's mission related goals for the coming year; and anything else such as volunteer recognition, staff recognition, new programs or projects, etc.

An annual report is different things to different professional operations (for-profit and nonprofit) but generally, an annual report is a document that in a concise, clear, but thorough format relates the true (verifiable) accounting or bookkeeping summation of a single nonprofit's entire expense (cost of operations) and all of its income for a single fiscal year.  This includes listing all income, all expenses, all assets, and any other line items that are traditionally standard in commonly accepted professional accounting best practices but are not included in one of these three types of accounts.  The goal of the annual report is to provide a real and complete picture of the organization's financial condition and operations for that given year in a clear, complete, in a relatively easy and quick format for ease of reading.  Often, the income will be broken out per revenue stream (i.e. income from: programs, the different fundraising methods conducted for the year, advertising, etc. or whatever methods the organization is using to raise funds); and too then the expenses are borken out by operations' costs (i.e. programs, services, fundraising, administration, etc. or whatever the organization's expenses are).  It is common that a nonprofit's executive director, bookkeeper, and CPA (and if a finance committee exists) will create, check, and double check an annual report.  It is finally verified as accurate and complete by the board of directors who will receive a final form, review it, and then in the next board meeting put it to a vote for it to be ratified.  Once ratified, it becomes an official organizational document.  It is compiled at fiscal year end (after an independent, professional, financial audit is conducted by a CPA) and is often mailed at the first of the new year to current donors (and any other key partners in the organization's work such as board members, trustees, etc.). As I said above, it is a powerful tool to clearly express to the nonprofit's current donors exactly what the financial health or picture is of the nonprofit that they've supported (and this is one of a few professional steps that retains donors as they are being "kept in the loop" as to what the organization's health and operations have been most recently).  Also, it is often requested by other types of donors (besides individual donors).  Usually grant donors, as a part of the grant application process, will request a copy of the most recent year's annual report, so it's important if a nonprofit is or plans to apply for grants to have a complete and accurate one on hand for ease in applying.  Too, if a potential donor who is new to your nonprofit is researching it because they are considering donating to it, it is not uncommon for them to call and request a copy of the annual report.  It is a great tool to use to demonstrate, again, not just the organization's current financial picture, but also to demonstrate the nonprofit's professionalism and transparency; and transparency is a confidence builder among donors.  If a donor who has never given before is considering giving to a nonprofit, calls and requests the most recent annual report and either gets the run around, is told there is no annual report, or is told one will be mailed to them but they never receive it - the potential donor will wonder if the nonprofit is not aware of standard professional nonprofit best practices, is not well run as an organization, or worse: if there is something the nonprofit is hiding.  This may cause the donor to forgo giving to the nonprofit altogether.  When any donor is considering giving to a nonprofit, the more forthright, complete, and true a picture of the nonprofit that the organization can provide for that donor (no matter whether the year has been "stellar" or not) the more confident the donor will feel because the organization is demonstrating (by providing a true complete picture of itself) its transparency and building a donor's confidence in a nonprofit's operations is one very key component to acquiring and retaining new donors.  Some annual reports are two to four clear but simply formatted pages and simply composed on a personal computer.  Others are created in annual report maker programs (and this is actually sometimes a tool included in a donor/donations database software package).  Still other reports are glossy, bound, and more detailed annual reports that were professionally printed and include glossy photos and more.  The size, expense in creating, or fanciness of the annual report is not as important as the accuracy of the information enclosed, the completeness of the picture given, and the extent of information that will be informative and helpful (without going overboard) to a current or potential donor or other type of supporter.  Finally, while it is an opportunity to thank everyone involved in the organization's effort for that year (and it is), it doesn't hurt to include a donation remittance envelope with each annual report sent out.

Many nonprofits, today, will provide their annual report (year after year) on their organization's website (usually given its own tab and resulting page or .PDF file on the website's donation page) and it is a very quick, handy, and again highly professional and transparent way to demonstrate to anyone visiting the nonprofit's website that it is a communicative, honest, and transparent professional organization.  Again, forthright proactive disclosure builds confidence.  Plus, putting it on the agency's website makes it easy for anyone with access to the Internet to get the information quickly and easily (without having to call your organization to request a hard copy be snail mailed).

Let me demonstrate how to pull an annual report together.  Let's say that you and I work for Baby Booties for All Babies (BBAB) on the fundraising team.  Our fiscal year (the calendar for the organization's accounting), let's say, runs from January to December (so, it's the same as the calendar year).  Let's say, too, that it's January 5, everyone returned to work after the holiday break, and the CPA that BBAB uses to conduct our annual independent financial audit has already phoned our nonprofit's bookkeeper leaving a voice message that they'd like to schedule the audit for the just ended previous year.  Our bookkeeper has already completed her financial year end work (i.e. finalizes totals for income and expenses, finalized final quarter financials and financials for the year, and all of these key financials have already been reviewed, voted on, and ratified by the board).  So, our bookkeeper and the organization is ready to be audited, so she calls that CPA and says, "...great, we're ready when you are...".

Let's say that the auditing CPA comes into our office, borrowing an empty desk for a few days to do his or her work, and finishes the audit after four business days.  They leave on the evening of the fourth day promising that their office will get the completed and accurate independent audit of BBAB's finances for the most recent previous year back to us in a couple of weeks.  After two weeks, our executive director receives the independent financial audit (which, by the way, is also a very powerful tool, in and of itself, to again provide transparent information to potential donors, in order to raise funds usually from larger amount donors such as grant donors or major donors as again, the document demonstrates transparency, but also gives an independently verified accounting of the nonprofit's books).

Once we, in the fundraising office, get the ratified previous year's final bookkeeping numbers and the audit we can sit down to create the just recently ended previous financial year's annual report.  We create it in Microsoft Office on one of our work computers.  We decide to include the following in the annual report: that BBAB is a 501(c) (3) nonprofit, BBAB's federal identification number, our mission statement; quotes from three recent peer reviewed and reputable studies' findings demonstrating what needs exists in the community, that until BBAB provided the services it does were not being met; a couple of photos from the recent year's programs (our staff disseminating knitted slippers and booties to low income new born babies' mothers), photos from this past year's services (clients receiving booties or shoes for their one year's old children); a thank you letter (for supporting BBAB which succeeds at its mission) from one of our clients; a letter from our board president thanking supporters and summing up our organization's year; the complete service statistics for the year's programs and services (including the demographics of the populations served); the financial information standard in any annual report; the ratified, summarized, but complete fiscal year end Balance Sheet; a page listing and thanking all of our volunteers; and a page listing and thanking all of the people or entities that donated $100 or more that year; and a list of the goals and expected outcomes of those goals for the coming year.

For the financial information, we figure out and provide the following breakdown.  We know from our bookkeeper (as the board ratified the following and the independent audit verified that the following bookkeeping was in fact accurate ) that BBAB received the following in income, spent the following in expenses, and also owns the following assets:

Expenses
Programs
New Booties for Newborns - $15,000
Little Shoes for Mighty Small Feet - $10,000
Big Knitters for Little Feet - $8,000
Services
Newborns' Slipper, Shoe, and Bootie Dissemination - $45,000
One Year Old Slipper, Shoe, and Bootie Dissemination - $35,000
Slipper, Shoe, and Bootie Acquisitions - $10,000
Newborn and Infant Podiatry, Shoe Store, and Special Needs Information and Referral Services - $7,000
Overhead - $5,000
Administration - $20,000
Fundraising - $20,000

Income
Annual Appeal Donations - $25,000
Major Donors' Contributions - $20,000
Golf Tournament and Sports Collectors' Memorabilia Auction Special Event Fees & Donations - $15,000
Gala Dinner and Art Exhibition Special Event Fees & Donations - $15,000
Quarterly Newsletters' Donation Remittance Envelope Donations - $9,000
Board Members' Contributions - $12,000
Grants - $20,000
Sponsorships $1,000
Newsletter Advertising Income $1,000
In Kind Contributions' Fair Market Value $1,000
Interest from Endowment $500
Interest from Stocks $100
Interest from Bonds $100
Interest from Savings $200

Assets
Baby Booties for All Babies' two story, 3,000 square foot building - $1.2 million
Endowment - $7,000
Savings - $5,000
Stocks - $40,000
Bonds - $100,000

While listing this all out is fine, to save room and to make reading these breakdowns easier, we put the above items and numbers into Excel, look up how to make pie charts from that information in Microsoft Office's Excel, and render 3 pie charts that we cut and paste into our annual report: expenses, income, and assets.  We include these three pie charts along with the above listed information and wind up creating a concise, clear, but complete, and truthful annual report.

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