Miniseries – Best Practices for the Month-end Close – Financial Reporting & Analysis
Waiting on financial reports is frustrating. It’s even more frustrating when reports are issued late AND they are hard to read. To make informed financial decisions and react quickly to changing economic and other conditions, it is critical for nonprofits to master closing the books on a timely basis while also providing understandable and accurate reporting of financial information. At CLA, we prepare monthly financial reporting packages for hundreds of clients each month and are familiar with the challenges and frustrations of financial reporting. Here are several common issues that we encounter and suggestions to help you improve:
No time for analysis – Typically, the closing process itself has bottlenecks and delays that leaves too little time for analysis. Controllers and CFO’s are strapped to get the financials out the door and don’t spend enough time looking at the big picture. Improving the close provides time for valuable analysis and clear communication to stakeholders.
Suggestions:
- Review your closing checklist process and identify the root causes of your delays (revisit our first blog post in the series below).
- Identify what analysis can be done before the end of the month and during the first week of the subsequent month when time constraints are usually lighter. For example, a preliminary review of the income statement by program or department can help you spot potential problem areas to address earlier in the close process.
- Develop a list of saved reports that you use regularly for analysis and review.
- Solicit departmental managers’ feedback earlier. One way to do that is to send out a general ledger (GL) detail of their activity before the end of the month or post it to their dashboard. Request feedback by the 5th of the month.
Overly dependent on Excel – If you build financial statements in Excel, you may spend a lot of time in formatting numbers and verifying (and re-verifying) to check that there are no errors in the financial statements. While Excel-based financials may be unavoidable for some, eliminating it should be one of your top goals.
Suggestions:
- Explore the reporting capabilities of your general ledger software – can core reports be generated directly out of the software?
- Consider a chart of accounts (COA) overhaul so that summary and detail reporting can be generated out of your GL software.
- If changing software isn’t an option, set up the financials as templates in Excel with pre-defined formatting. You may be able to export data from your GL software and have Excel look up the values so that formatting, totals, and subtotals don’t need to be modified each month. Also, set up error checking formulas to cross-check the change in net assets between the statement of activities, statement of financial position, and statement of cash flows (and any other reports you include).
Too much detail – We often see client financial statements that are 25 to 50 pages long and readers struggle to see the forest for the trees.
Suggestions:
- Include a summary version of the statement of activities. This rolled up version should condense the statement of activities to a single page. In some cases, a summary statement of financial position can be useful as well.
- Include a cover letter with the financial statements that includes a bullet point summary of material changes in cash, other assets, liabilities, revenue, and expense. I’ve often had a board member thank me for this as they don’t enjoy looking at the numbers!
- Include a simple dashboard that graphs cash balances over time, YTD revenue, and expense compared to budget and prior year. This can be as simple as three graphs on a page, which provides a graphical picture of how financial activity is trending.
Perfectionism – Some controllers and CFOs try to hold the books open too long to make sure their numbers are perfect. By the time the financials are released the data can be stale and it may be too late to course correct with better financial decisions.
Suggestions:
- Be willing to accrue estimates, if necessary.
- Aim to get the financials out by the 15th, regardless.
- Use a reasonable estimate of materiality when considering whether to hold the books open. For example, a nonprofit with a budget of $1MM in revenue could choose a materiality threshold of $10,000 (1%).
Making an upfront investment of time to improve your financial reporting process will save you hours each month on the backend. Users of financial information will also thank you for making changes to provide summary financials, a concise written summary, and a simple graphical dashboard. If you would like assistance, we have a team of professionals that can help you get there!
Previous posts in this series:
Series Intro and Closing Checklist: Intro and Closing Checklist
Closing AP, Accruals and Credit Cards: AP, Accruals, and Credit Cards
Closing Revenue: Closing Revenue
Jeff loves helping nonprofits achieve financial excellence through improved monthly reporting, cashflow management, strategic planning, and systems design.
Good information regarding analysis. My caveat is that I work in a County based Human Services organization and our Board meetings are always the second Thursdays of the month. So on short month, those that start on a Thursday, I am lucky if I can even get my financial reports done before sending out three days before the meeting.