When you prepare your annual financial statements, do you:
A) Go for the “bare minimum” option; or
B) Look for a presentation that will give your stakeholders and your potential funders a clear and easily understood picture of your financial health?
In answering A, we are sure that you are looking to minimise costs whilst ensuring compliance with the organisation’s reporting requirements. However, there is a risk that, in taking this option, readers of the financial statements will not obtain a good sense either of what the organisation does or what its real financial position is. At CMDS, we have long believed that the annual financial statements are one of the organisation’s most important fundraising documents and so need to be put together with clarity and care.
To illustrate this, we will share with you some of our observations from a recent review of 2 sets of annual financial statements, for “NPC X” and “NPC Y”:
- Whilst NPC X does not indicate the source of the funding it received or of the services it rendered, NPC Y shows all its major funding and the sources of its contract income. Is the disclosure of the main sources of your income sufficient to help readers to know where, and who, your income comes from?
- NPC X has the word “equity” in its statements while NPC Y speaks of its “reserves” and shows, under its reserves, an “equipment fund” equal to the book value of its equipment. Do your statements use appropriate non-profit terminology and explain the purpose of your reserves? Do your accounting policies explain, as those of NPC Y do, that, as a not for profit company, all its reserves are non-distributable?
- NPC X does not account for deferred income (i.e. income that has been received for a specific time period and/or to use in meeting particular costs that has not yet been spent) whereas NPC Y does and so clearly matches the income it receives to the related expenditure. Is the income you disclose just what was received in the year or does your policy for revenue recognition enable you to ensure relevant income and expenditure is matched, potentially avoiding major fluctuations from one year to the next in overall surplus or deficit?
- We found that NPC X does not explain the nature of loans to related parties (in their case, entities with common directors) whereas NPC Y explains its related party transactions. Are those who read your statements assured of the transparent disclosure of transactions with related parties?
- In case you feel that NPC Y gets it all right, both NPC X and NPC Y provide a detailed breakdown of their annual expenditure but neither organisation shows that expenditure in a way that demonstrates the nature of their programmes and activities. Do your statements do this or do they simply provide an alphabetical list of expenses?
If you answered “No” to one or more of the above questions, this might be a good time, before the year-end rush is upon you and before the audit is scheduled, to look again at the way your annual financial statements are presented and to call CMDS if you feel that we could assist you to draft and compile financial statements in a way that allows readers of those statements to get a clear picture of the nature of your organisation’s work and finances; a small investment could win you new friends and, even, some new sources of funding!