This section explains this type of report, how to write one, and why they are necessary for the effective management and long-term sustainability of your organisation.
What is a financial report?
A financial report is also known as a statement of income and expenditure. It is a written record of all the money your organisation received and spent over a specific period of time
Why do I need to write a financial report?
Financial reports are necessary for the effective management of your organisation’s activities and projects within the limits of your budget. They help to identify problems early so that these can be corrected before your organisation runs into financial difficulties.
Who should receive financial reports?
- The governing board of your organisation – they should receive updated reports regularly.
- Your donors – they will let you know how often they require reports.
- All stakeholders – your organisation must produce an annual report that includes a copy of the audited income and expenditure for the whole financial year and this should be distributed to all stakeholders.
Monthly financial reports
A monthly financial statement should show income and expenditure for the month, year to date figures and the budget for the year. This will enable you to check your financial record and compare your spending to the budget for the month (the financial plan) and see how it compares. You will need to explain why you have spent either more or less than expected each month. If you have overspent you can apply to your funders for more money, or make sure that you keep within your monthly budget. If you have underspent then you can consider expanding the scope of your activities.
It is recommended that you keep accurate daily records of your income and expenditure. If you do not have daily financial records it will be difficult to see why you are not managing to stay within your monthly budget. This could either mean that the project ends up running out of money before it achieves its goals, or it does use what it has been given to help the target group
Annual financial reports
The figures from all the monthly reports should be added together in an annual report to give a figure for the year. This should be done in the form of a detailed balance sheet, prepared by an auditor or bookkeeper at the end of each financial year. The financial year runs from 01 March to 28 February.
When you have the annual report you need to analyse the information and write some notes on it. These should explain the differences between the figures you have and the budget you set at the start of the year. The report and the notes should be approved by the governing board of your organisation before being passed on to anyone else, including the donors
What does this report mean for the organisation?
Your organisation needs to discuss the following questions: are you spending more or less than expected on the project; if you are spending less, is it because you are doing less than originally planned; if you are spending more, will your organisation run out of funds?
What are the areas of difference?
It is normal for there to be a difference between what you actually spend and what you budgeted for. Allowances can be made for this by accounting for ‘contingencies in your budget, to allow for unexpected costs. But make sure that your explain this and that your donors agree.
You need to look at why costs are higher or lower than expected. This could either be due to inaccurate planning or to price changes. For example, maybe you did not expect to have to travel as much as you did. Or perhaps a rise in petrol prices has made travel more expensive than you accounted for.
Month to month spending may also differ quite a lot due to once-off expenditures such as for equipment or training courses. This is why the monthly reports need to include figures for the year to date – so you can get a good general idea of the spending of the organisation in comparison to the budget. If you overspend your budget by more than 20% on daily running costs it usually means you have a problem, which needs to be urgently addressed.
Underspending by too much can also be a problem. It can mean that you are not using your resources well or you are not achieving what you set out to do. You need to tell your donor as soon as possible if you see you will not spend all the money, or if you are unable to carry out activities as planned. Explain the situation and decide what you want to do. Either ask permission to use the money the following year - you may be able to postpone the activity until then – or to use the money for something else. If you do not request permission in advance, you will be expected to give the money back
A qualified auditor needs to audit your financial records at the end of every financial year. This should be done by 1 April for your annual report to be able to include an audited financial report.
An audit officially confirms that the financial records of your organisation are a true record of your financial activities. It also helps you learn how to manage the financial systems of your organisation better
How to choose an auditor
Get recommendations from other NPOs as it is good to have an auditor who knows how such organisations work. Also, try to use the same auditor every year so they become familiar with your particular financial issues. You might find that there are auditors in your community, or in a nearby community, who are willing to do volunteer work for an NPO.
Your governing board must always approve an auditor before being appointed. You need to write a note in your organisation’s minutes that the governing board has approved the auditor. If you are a Section 21 company this must be agreed on at an Annual General Meeting (AGM).
Remember to include the cost of the audit in the funding applications of your projects. Also build a good financial management system throughout the year so that you are prepared for your audit
The three parts of an audit report
A statement of income and expenditure
This can also be called a financial statement or financial report.
The balance sheet
This lists all your organisation’s assets (what the organisation owns) and shows the total worth of your organisation.
The auditor’s declaration
This states that the finances of your organisation are in order, and that your statement of income and expenditure and balance sheet have been reviewed. This declaration will not be issued if there are any financial irregularities. This is a serious matter and your auditor will advise you what you need to do.
It is very important that your organisation understands the auditor’s report. It is part of the auditor’s job to make sure that you do, so do not feel bad if you need it to be explained to you.
Building a good financial management system is extremely important for the long-term sustainability and effectiveness of your organisation.