The most important part of your board reports
This article provides an explanation of what the narrative is, why it's important, and how to create one.
Simply put, the financial narrative is a short written document explaining the financial statements. This is page one of your board financials. It provides a quick summary of everything the board needs to know. Every board member, regardless of their financial acumen, can read it quickly and understand what they need to know. If they want to then dig further into the financial statements, they can.
Scroll to the bottom for a link to the downloadable template
The basic structure of a nonprofit financial narrative
Overview and Big Picture of Reserves
Budget vs. Actual Variances (income then expenses)
Specific Program/Fund Details
Other
Overview and Big Picture of Reserves
The first thing the board needs to know is how much money do you have? This is an interpretation of the Statement of Financial Position (Balance Sheet). Point them to the equity section of the balance sheet that lists out the net assets with donor restrictions and the net assets without donor restrictions. If you have an operating reserve, or are currently working on building one, then you point this out as well. Then interpret these amounts into months of operating.
Here is an example:
As you can see on the attached statement of financial position, our organization has $250,000 of assets without donor restrictions. This is equal to 3 months of operating expenses. Our goal is to have six months of operating expenses by the end of next fiscal year.
Doing this puts the rest of the financials into context. The budget vs actual now makes sense in relation to the current reserve goals. If the organization already had plenty of reserves, then a break-even or deficit budget might be fine. This organization is working to increase their reserves and therefore a surplus budget would be expected. The financial position is good since there is already a three month reserve, but the hope is for it to get even better.
Budget vs. Actual Variances (income then expenses)
Now that the context is set, the budget vs. actual can be interpreted. See this article for a detailed explanation of the budget vs. actual report and why it’s important.
The first paragraph in this section should be a quick summary of the total income and expenses as compared to the budget.
Here is an example:
As you can see on the attached budget vs actual report, our organization is on budget. With 50% of the year complete, we have raised 52% of our budgeted income and spent 49% of our budgeted expenses.
After this paragraph you can dive into detail on the main income and expense accounts. Here it’s important to only focus on the major income and expense accounts, or any smaller accounts if there is a major variance. For a large budget line such as salaries and wages, a small variance may have a large impact on the bottom line. The same is true for revenue. In this part of the report you want to explain the reason behind any variances and whether or not the accounts will even out, or if changes need to be made.
Specific Program/Fund Details
Every organization is unique and this part of the narrative is a chance to give an update on important programmatic or grant funding. This will vary between organizations.
Other
In addition to an interpretation of the financials, this section allows you to explain any other important reporting requirements, procedural changes, or other updates.
Here is an example:
Our accountant has filed an extension for our 990. The 990 is due on November 15th. We plan to file the taxes in the next month. As discussed at our last board meeting, we have switched payroll providers. Our first payroll was run successfully last month.
Summary of Financial Narrative
Remember to keep it simple. Ideally, each board member should be able to read the first two paragraphs and have a good sense of the finances. If the nonprofit financial narrative ends up 5 pages long, the board may not read it. Try to keep it under two pages long. Here is a downloadable template.
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