How Transparent Financial Reporting Builds Trust with Donors
We are approaching the end of 2024, and UK charities are once again re-evaluating their strategies for attracting and retaining donors. Despite improvements in the financial climate, the demand for their services is still on the rise, with 86% of charities reporting an increase.
The competition for funds has already intensified, and new difficulties are expected next year.
What’s to be done in this context?
According to experts like Hobby Dean, not-for-profit senior solution consultant at Sage Intacct, financial transparency could save charities that struggle to attract donors.
Charities that offer clear financial data and have a commitment to reporting them periodically see better donor retention than those which continue to keep everything in the dark.
But what does transparent financial reporting entail, and how can you achieve it? Let’s get a closer look at this.
What Does It Mean for a Charity to Be Financial Transparent?
As a charity, you can acquire financial transparency by creating honest financial reports and sharing them with your donors, the government, and the general public. UK government regulations already require you to publish audits and cash flow statements, but many charities leverage these reports to establish trust with their donors as well.
Some indeed have more success than others. As pointed out by Dean, patrons are no longer interested in a silo approach to metrics, which makes reports difficult to follow and understand.
Today, you’ll benefit more from a professional strategy, involving clear financial reports that have been tailored for the general public.
Why Charities Should Opt for Transparent Financial Reporting
When you disclose financial information about your charitable organisation, you allow those interested in helping to take a glance at how you are currently managing funds and where you’re heading. It can be a lot of work to evaluate everything and draft a clear report. However, there are several benefits to becoming financially transparent.
It Shows Current Donors that You Are Doing Your Job
People who support your charity efforts often see themselves as investors. They want to see their cause succeed and need to be reassured that their money is put to good work. In fact, recent research performed by the Charity Commission revealed that the most important aspect people want to find out about charities is how they use their funds.
Let your donors know that your strategy works. Allow them to see that you manage to maintain a positive cash flow and you are ready to face new challenges. Show that you are a good investment to keep them involved in your cause.
Helps You Attract New Donors
Charity work is important, but there are lots of charities that need funding out there. In 2024, the main struggle for charity leaders is increased competition. Many invest in marketing campaigns designed to highlight results and show the human face of their organisations.
However, garnering trust remains the strongest strategy. It’s all about the charity’s reputation. When you demonstrate reliability, ensure that funds are used for their intended purpose, and manage finances effectively to prevent the charity from facing future decline, your chances of attracting new donors increase significantly.
Open Book Reporting Allows for Better Financial Planning
Being financially transparent benefits the charity both externally and internally. If you offer your team access to cash flow reports, donor behaviour, and expenses, they can have a clear image of the internal accounting process.
This not only helps catch accounting errors before they turn into disasters, but can be an efficient evaluation and planning instrument.
With a stronger financial strategy and a well-informed team that shows professionalism, you’ll quickly position yourself as a trusting charity, with high chances of attaining its goal.
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What Should You Include in a Financial Report for Your Donors
Even if they are interested in your evolution, most patrons are busy people. The key here is striking a balance between the information donors consider important and the financial details you need them to know in order to retain their support.
In most cases, if your report includes the following three elements, that’s enough:
Statement of Financial Position (Balance Sheet)
This is a financial document that functions as a snapshot of your current financial situation, allowing donors to take a look at your assets, liabilities, and net assets.
Assets refer to everything the charity owns, from cash and properties to investments. The charity can use these funds for its campaigns. Liabilities allow donors to assess how much the charity is in debt and if it is financially stable or not. Finally, the net assets represent the difference between assets and liabilities. A positive number is good news.
Donors can use the Balance Sheet to determine if the charity is responsible or if its previous financial decisions may affect its solvability in the future.
Statement of Financial Activities (SoFA)
If the Balance Sheet shows donors you are solvable, the Statement of Financial Activities tells them more about how your charity manages funds. This financial document needs to be extremely clear and well-organised if you want it to make an impact on your audience.
Let’s take a look at the main components:
- The sources of your income – Where are your funds coming from? Mention donations, grants, and investments to show that you rely on trustworthy income sources and can justify your funds.
- Expenses – Explain how the charity spends funds. Usually, these are divided among operational costs, programme expenses, and fundraising efforts.
- Surplus or deficit – Do you manage to break even or are you spending beyond your means? The donors need to know if the charity is responsible.
- Restricted or unrestricted funds – Does the charity have a well-established plan on how to allocate funds or there’s flexibility in using them?
- Changes in reserves – Were there big shifts in net assets during the reported period? Donors may be interested in knowing if the charity can face unexpected situations.
Statement of Cash Flows
The Balance Sheet and SoFA show mostly how you manage your finances in theory, but the Statement of Cash Flow is a more tangible financial document. It shows exactly how much money you spent on internal operations like salaries or contractor wages and how much money you received from donations during the period of reporting.
The Statement of Cash Flows allows donors to grasp the amount of money that entered the charity’s accounts from investments and how much from quick loans or other financial instruments.
Show that you can manage cash flows and keep the charity afloat in case of financial difficulties.
Ways to Integrate Financial Transparency into Your Charity’s Operations
It’s clear by now that being transparent about financial reporting is an essential part of building a reputation as a charity. But where do you begin?
Hire Financial Professionals
When opting for ethical reporting you want to be clear and you want to be thorough. If your financial reports look sloppy, so does your image. Having a team of professionals like FinOp Partners to ensure precise financial oversight for your organisation can improve accountability with your donors and trustees.
Make Reports Easy to Find
Make sure your financial data is easily available to everybody. You can create a special section on your website where you can upload your financial documents periodically. Some people like to research several charities before reaching out and requesting more information. The more they can get from your website at this stage, the better.
Update Your Donors Regularly
Stay in touch with your donors and trustees through emails or phone calls where you can brief them about the charity’s successes and struggles. Send them transparent reports to highlight how their donations have been spent and what are your plans for the next quarter. It shows that you are responsible and that you value their implication.
Be Open About Financial Challenges
Every organisation bumps into obstacles once in a while. For instance, a 2024 report showed that 51% of charities struggle to find volunteers for their projects. However, you shouldn’t hide your administrative or financial difficulties from your donors. Let them know you need help and they may be able to provide it. But back your requests with a clear report about your financial situation and offer a strong strategy to ameliorate it.
How We Can Help
At FinOps Partners, we believe that showing financial integrity is the number one step charities can take to increase donor engagement. However, financial transparency starts with an honest evaluation of your finances.
Our team can develop an audit strategy for your charity, establishing KPIs to be tracked and creating clear financial reports that can be easily understood by your audience.
These improvements will enable your charity to prove the transparency and accountability the public expects.
If you have been struggling with attracting and retaining donors, poor financial reporting may be the cause. Book a free call with us today to see where you are standing and what actionable solutions you could take.
Author Spotlight
Carl Wakeford, ACA
Carl began his career within the Big Four where he spent four years auditing many public and private sector organisations, and qualifying as a Chartered Accountant. With a passion for business resilience, Carl specialised in risk consultancy, helping organisations strengthen financial processes and controls. Since leaving the Big Four, Carl has worked within multinational commercial finance teams, fast paced start-ups, the charity sector, and is now the CEO of FinOps Partners.
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