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Financial statements are essential tools for evaluating performance, planning for growth and managing risk. Yet many business owners, board members, donors and investors don’t have formal accounting training. Presenting financial information in a clear, approachable way can help stakeholders better understand results and make informed decisions.
Know your readers
The people who rely on your organization’s financial statements probably come from different walks of life. Some may have financial backgrounds, but others might not. And it’s this latter group you need to keep in mind as you supply financial data.
This is especially true for nonprofits, such as charities, religious organizations, recreational clubs and social advocacy groups. Their stakeholders may include board members, volunteers, donors, grant makers, watchdog groups and other members of the community. But it also may apply to for-profit businesses that share financial data with their boards, employees and investors.
Don’t assume all your stakeholders understand accounting jargon; consider providing definitions of key financial reporting terms. For instance, a nonprofit might explain that “board-designated net assets” refers to assets set aside by the board for a particular purpose or period. Examples include safety reserves or a capital replacement fund, which aren’t subject to external restrictions imposed by donors or the law. While this definition might seem obvious to a nonprofit’s management team, stakeholders might not be familiar with it. You could also provide internal stakeholders with some basic financial training by bringing in outside speakers, such as accountants, investment advisors and bankers.
Turn numbers into visuals
In addition to providing numerical information from your income statement, balance sheet and statement of cash flows, consider presenting some information in a graphical format. Long lists of numbers can overwhelm financial statement users. Pictures may be easier for laypeople to digest than numbers and text alone.
For example, you might use a pie chart to show the composition of your business’s assets. Likewise, a line or bar graph might be an effective way to communicate revenue, expenses and profit trends over time. Additionally, dashboard-style reports can help highlight key performance indicators (KPIs), cash flow trends and operational metrics.
Focus on key ratios
Financial ratios show relationships between key items on your financial statements. While ratios don’t appear on the face of your financial statements, you can highlight them when communicating results to stakeholders. For instance, you might report the days in receivables ratio (accounts receivable divided by annual revenue multiplied by 365 days) for the current and prior reporting periods to demonstrate your efforts to improve collections. Or you might calculate gross profit margin (revenue minus cost of goods sold, divided by revenue) from the current and prior reporting periods to show how increases in materials, labor and operating costs have affected your business’s profitability.
Another useful tool is the current ratio (current assets divided by current liabilities). It’s a common measure of short-term liquidity. A ratio of 1:1 means an organization would have just enough cash to cover current liabilities if it ceased operations and converted current assets to cash.
It may also be helpful to provide industry benchmarks to show how your performance compares with others in your industry. This information is often available from industry trade publications and websites.
Keep the message straightforward
Clear communication can strengthen trust in your organization’s financial reporting and help stakeholders feel more confident about the decisions they make. Contact us for help developing financial reports and presentations that improve understanding while supporting transparency and credibility.
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