Managing an organization without knowing your financial position is like working in the dark. Budgets, financial reports, and money management skills are essential in running a successful Local Community Institution.
There are a lot of reasons people give for not devoting their time and resources to financial reporting. It can be difficult, it can be frustrating, and it might not feel relevant to the “ministry” you are called to. But throughout the many years that Partners Worldwide has been walking alongside local partners all over the world, there is one constant truth: LCIs that monitor their finances closely tend to be much more successful and sustainable than LCIs who do not.
Let’s start by discussing budgeting. Crafting a realistic, compelling budget is like putting guardrails on a road. It keeps you on track. Budgets give your entire team - staff, board, volunteers, mentors, donors, and clients - a common point of reference. If you aren’t currently using a budget, now is the time to start! If you have a budget, make sure you’re reviewing it regularly. Budgets should be written down, documented, and distributed with all key shareholders. They should be challenging yet achievable.
Next, financial reports. While there are numerous types of financial reports that you may find useful, the two most basic and important reports are the Balance Sheet and the Income Statement (also called a Profit & Loss Statement, or P&L). As described in the PW Business Training curriculum, a Balance Sheet is a reflection of the net value of a business at any given point in time, while an Income Statement shows the results of operations during a period of time in terms of revenue, expenses, and net income or loss.
It’s vitally important for LCIs to know what these financial statements are, but more important is knowing how to read them and use them to make informed decisions. As with most things in life, practice makes perfect. Running these reports monthly, reviewing them regularly, and seeking wisdom from trusted financial experts are great ways to hone your skills in reading and analyzing financial statements.
Lastly, as outlined in the Governance section of this rubric, it’s important that all LCIs are not only legally registered entities but also audited annually. This is a mark of professionalism, trustworthiness, and is a necessary requirement in securing access to capital from banks and lenders. Simply put, an annual audit shows you are serious about the organization you run. Auditors can help you identify “blind spots” or weaknesses in your operations that you might not be aware of; they can also help you with legal requirements to maintain your operations.
One reason why financial reporting is important: Partners Worldwide currently has loans disbursed to more than 10 LCIs through The PW Fund (see our 2-pager on Access to Capital for more information). There are several more LCIs seeking loans in the near future. All of these LCIs must be audited annually and demonstrate a proven track record of using regular financial reports!
Just getting started?
- If you haven’t already, start out by reviewing the PW Business Training curriculum. Sessions 6-8 deal with financial management and offer practical, time-tested solutions. Contact your local PW staff for access to these training materials.
- For nonprofits, check out this brief article entitled What are the Basic Financial Reports that a Nonprofit Must Prepare?
- Here’s a good resource on the importance of GAAP (Generally Accepted Accounting Principles) with NGOs.
- Watch these quick, helpful 2 minute videos:
Want to go deeper?
- We highly recommend the Harvard Business Review’s Guide to Finance Basics for Managers. This comprehensive guide provides a great intro on finance basics, along with advanced chapters on financial decision making, understanding ROI and cash flow, how to analyze costs and benefits, and the limits of relying too heavily on financial data. If you download only one tool on financial reporting and management, this is the one!
- From the Nonprofits Assistance Fund, here is a simple and helpful tool for Analyzing Financial Information Using Ratios
- More in-depth learnings on Financial Statement Analysis can be found here at accountingtools.com
- We’ve created an LCI Financial Health Check for our LCIs to use to evaluate their financial health in five key areas: basic systems, internal controls, planning, reporting, and staff.
Please email firstname.lastname@example.org if you have any questions.