Good Governance: The Nonprofit Case for Annual Reports By Charles Bogguess, MBA, CPA I’ve often wondered why I haven’t seen more nonprofit annual reports from our chapters. One of my first

projects as a chapter chief financial officer was to produce a chapter annual report. It captured the attention of stakeholders and served our corporate development purposes well. And yet when I speak to financial officers around the country, too often this project has been relegated to one of those aspirational goals we didn’t find sufficient time and attention to complete. The annual report is a cornerstone communication vehicle in our corporate world. The business acumen of our membership is up to the challenge, and yet we often don’t make full use of this very fundamental and important business communication tool in our nonprofit settings. The annual report is the one document that discusses sources and uses of funding and concisely recaps the year’s accomplishments of the organization. In most states, nonprofits that raise money are required to produce an annual report. To gain a seal of approval from many watchdog groups, a nonprofit may need to publish an annual report. And increasingly, corporate partners want to see evidence that funded organizations are legitimate and operate professionally. For these purposes, there are few equals for an annual report and financial statements audited by an independent certified public accountant.

A well conceived annual report will generate supporter interest and contributions. Even though nonprofit organizations aren’t required to produce an annual report like publicly traded companies, most sophisticated nonprofit managers recognize its inherent value. Plainly stated, creating an annual report is a good idea. Annual reports can support the organization’s mission in a variety of ways. Among other benefits, they can:

• provide an introduction and education to influential leaders about our mission;

• communicate activities and accomplishments annually to our community;

• cultivate new supporters and convince existing contributors that their funds are being used wisely;

• reinforce the organization’s value proposition to members and other stakeholders;

• recognize special people including donors and volunteers; and • serve as a historical record of the organization’s progress.

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But since an annual report isn't legally required for nonprofit organizations, leaders often struggle determining what should be included in an annual report. It isn’t a requirement that a great deal of money be spent on glossy reports. But it is essential that the annual report be geared to the target audience and conveys a compelling story of accomplishments and illustrates the value proposition. It should also convey important intangibles such as the professionalism of the leadership, operational team effectiveness, and fiscal discipline of the organization.

Here are twelve tips will help you craft an outstanding nonprofit annual report.

1. Spend time clarifying the big picture message and use that as the primary report focus. Always begin with your key message and your achievements. What three things are you most proud of from last year? What aspects would you emphasize if you only have five minutes to tell a stranger about your nonprofit's good work? Your annual report should flow from the answers to these questions. Don’t treat your annual report as a summary of your current work plan. Annual reports summarize what has already happened. You can talk about the present or the future in the executive message or in a small section near the end of the report. Readers will expect to read about recent accomplishments, not current activities or future plans.

2. Focus on accomplishments, not activities in your annual report. Contributors want to know what you did. But more importantly, they want to know why you did it. What were the results? Why did you spend your time and money the way you did? What difference did it make? Return on Mission (ROM) instead of Return on Investment (ROI) is the key metric for a nonprofit. Connect the everyday activities of your organization to your mission statement. Don’t assume that readers will automatically understand how your activities help you achieve your mission. Make it clear for them.

3. Get rid of administrative trivia and add impact to your annual report. Implementing a new budget process or back office system may be big accomplishments from where you sit. But they have little to do with accomplishing your mission and hold little interest for annual report readers. Inspire contributors by highlighting noteworthy achievements related to your mission in your annual report.

4. Don’t over-emphasize fundraising accomplishments in the annual report. Contributors expect you to raise money. But fundraising accomplishments should not be celebrated in your annual report on the same level as your mission-related accomplishments. Readers of your annual report are more interested in the Return on Mission (ROM) from your funding than how you raised the money. While it is appropriate to include information on how well your fundraising efforts are going, it’s best to place this information in the financial section of your report, rather than front and center.

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5. Include photos in the annual report. Yes, pictures really are worth a thousand words. Some of the people reading your annual report won’t actually read it. Show them what you’ve been doing with photos. Some readers will rifle through the annual report like a comic book- taking in the pictures and the captions. Illustrate accomplishments with pictures of people who appear to be participating in organization activities or benefiting from your programs are particularly effective, especially if readers can make eye contact with the people in the photos. Reflect on whether a supporter will receive your big picture message even if they only look at the pictures.

6. Write captions that tell your story. Now that you’ve got them looking at the photos, tell a story with your captions. Don’t force readers to guess at the messages your photos are telling. Don’t just state who/what is in the photo. Connect the photo to an accomplishment. If contributors read nothing but the captions in your annual report, they should get a sense for the good work last year.

7. Include personal profiles in the annual report. Donors will be more impressed with real stories about real people than general summaries of your work. Explain what you have accomplished overall. Then humanize your statistics with some personal profiles. Highlight how your work helped a specific group or individual. Share a volunteer’s story of how they made a positive difference and how the experience made them a better person.

8. Make sure your financial statements are formatted properly and error free. Generally accepted accounting principles in the United States specify a standard format for financial statements of nonprofit organizations. And this format is not the same as the more common corporate statements. Nonprofits usually use Fund Accounting and standard statements such as Statements of Financial Position (similar to the Balance Sheet), Statements of Activities (replaces the Income Statement) and Statements of Functional Expenses (nothing similar generally included in corporate statements). They will clearly identify when funding is restricted by donor stipulations. It is important that the financial statements in the audit report be consistent with generally accepted accounting practices for nonprofits. That conveys a sense of confidence to the reader that management is knowledgeable in the management and practices of nonprofit organizations. And it goes without saying that the statements should show consistency and mathematical accuracy throughout.

9. Explain your financials. Many of your supporters won’t know how to read nonprofit financial statements and/or won’t take the time to read them. So help them extract meaning from these pages with a short financial summary narrative. Include pie charts, bar graphs, or other visuals that help readers see the big picture and understand financial trends. There is no better place to address key supporter questions such as: Where does your money come from, how do you spend it and where is it now? What are your main fundraising strategies? Did you implement any cost-savings measures this year? How are the results of the key programs and initiatives measuring up against initial estimates? Help your supporters and potential donors to quickly grasp the vital information in this section of the report.

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10. Balance the recognition of contributors, description of accomplishments and core financial data in the annual report. Contributors at all levels need to be recognized. Active volunteers and financial donors often take deep personal satisfaction from public recognitions. The annual report provides yet another forum to recognize these important individuals and organizations. And our first three points above emphasize the need to describe the accomplishments of the past year. Finally, the organization cannot lose sight that the primary purpose of an annual report is to present the financial statements of the organization. Nonprofits need to strike a balance between using the space in their annual report to meet each of these three objectives. That is not to say that each should occupy the same number of pages. And there is no formula as to the space devoted to each. But when you proofread the annual report, be cognizant of finding the proper balance for your unique operation.

11. Triple-check your contributor lists. There’s no better way to sabotage a future donation than to write the contributor’s name incorrectly in your annual report. If you are uncertain about a name, don’t guess. Check it with the contributor. Also carefully check the names of corporations, government agencies and foundations that gave funding and grants. The names people call these organizations in conversation are often abbreviations for the full legal names that belong in your annual report.

12. Tell supporters how they can help. Never leave a potential supporter wondering how they can help you. Once you’ve inspired them with the good works in your annual report and images of how others have benefited from participation, close new and repeat supporters by telling them how they can help you do more. How can they support you with their donations of money or time? Will you accept like-kind donations? If so, what is needed? Can they use a credit card? Be clear about the best ways to help.

Adapted from: 10 Tips for Writing a Great Annual Report by Kivi Leroux Miller