Re-Thinking Fiscal Year-End Financial Performance Reporting
Posted in News Story
By A. Michael Gellman, CPA, CGMA
July 14, 2020
A. Michael Gellman is an independent Fiscal and Financial Strategist (CFSO) for nonprofit organizations and a founding principal partner for Fiscal Strategies 4 Nonprofits, LLC. He is also a part of the Center for Public & Nonprofit Leadership faculty.
The pandemic and accompanying economic crisis are forcing nonprofit organizations to change their thinking when it comes to fiscal year-end financial performance reporting and messaging. We need to prepare in order to answer the question: How did we do?
I alternate between thinking time is moving too fast and time is moving too slow when it comes to the COVID-19 crisis and other simultaneous, unpredictable disruptions nonprofit organizations are doing their best to manage. On one hand, I have been hyper-focused on the day-to-day survival tactics nonprofits are dealing with as these questions come across my desk with great urgency. On the other hand, the answer always lies in the future and not in the past. You must look forward and plan how to best position your nonprofit to protect program continuity and to maximize use of your precious financial resources during a time of great community need.
I still firmly believe that long-term financial health is the key to delivering the most mission-related services. So, for now we should still be in protecting financial health mode, as this crisis is going to be with us for a long time. There is still great uncertainty and the near future is unknown.
However, we still need to report on how we performed in each fiscal quarter. Financial reports are always there to look back on, tell a story, and document results. Financial reports quickly become archival documents nestled away for future generations to look back on and ponder, not how did the organization perform, but did leadership make the correct strategic decisions.
For the next few years, the crisis and the resulting hyper-change will cause a somewhat temporary departure from tried and true year-over-year budget-to-actual performance and analysis (comparing current fiscal year results to prior fiscal year results). This disruption will likely be with us for at least two to three fiscal years, depending on when your fiscal year ends. All fiscal year-ends will be affected. It will be especially interesting to compare how the challenges will be different for June 30 year-ends vs. December 31 year-ends, as many nonprofits fall into one of these fiscal year-ends.
June 30 Year-End Organizations
Let’s first look at how June 30, 2020 fiscal year-end organizations are positioned.
On the positive side, June 30, 2020 year-ends could possibly have the calendar working in their favor considering the timing of the crisis. The crisis hit in full force during the middle of March, which gave these organizations 8.5 months of pre-crisis activity (ex. fundraising and programming) and only 3.5 months of crisis activity. These organizations had a greater chance that their major sources of revenue and funding were already accounted for or committed. Up until the crisis hit, most nonprofits were benefiting from a prolonged period of strong economic and market conditions. Consequently, there was a good chance that June 30 year-end organizations were in good financial position prior to mid-March.
However, on the negative side, June 30 year-ends that have major events, program services, and fundraising occurring in the last quarter of the fiscal year, could find themselves in real trouble. Organizations in this position were forced to cancel events, refund registrations, refund fees, refund sponsorships, etc. For most of these organizations, up-front expenses were lost, and cancellation insurance was either not adequate or did not cover pandemics. Whatever the case, a good year turned bad for these organizations in a matter of a few weeks.
December 31 Year-End Organizations
For December 31, 2020 fiscal year-end organizations, the calendar appears to be working against them. These organizations only had 2.5 months of pre-crisis activity and they are starting a long stretch of economic uncertainty before their year finishes.
However, on the positive side, December 31 year-ends will have more time to pivot, reposition and realign major events, programs and grants, in comparison to June 30 year-ends that had to postpone or cancel events and programs.
Need to Recognize and Pivot
Both June 30 and December 31 fiscal year-end organizations are affected, but they could be light-years apart in terms of performance and impact given the crisis. There are two key take-aways:
- Recognize that a 12-month melded financial performance that includes both pre-crisis and post-crisis activity by itself has very little meaning and could be misleading (this is the case for organizations that had 8.5 months of strong results completely wiped out a few weeks into the crisis).
- Pivot to a bifurcated financial performance analysis and reporting for the current fiscal year into a pre-crisis activity period and post-crisis activity period. While this bifurcation will not show up in the Form 990, it is important to make this distinction in your internal financial statements and board reports. These results will highlight what the old normal and the temporary current normal look like for comparison. More importantly, these separate financial reports will help with future forecasting and planning.
Planning Tip – Do not spend time lamenting how an expected strong “old-normal” year was taken away from you. Pivot to concentrating on natural quarter, 3-month rolling forecasts, using only the most current crisis information and recent performance to project how to re-position your organization. This approach should continue until true recovery begins and the new normal can be seen with certainty.
Writing the Finance Memo
Because of different fiscal year-ends, the crisis (and its effect on an organization’s sources of funding) will impact financial performance and messaging for at least three fiscal years and maybe more, even if this crisis ends within two years.
As you prepare each calendar quarter financial reports and analysis, keep the following messaging guidance in mind as you draft your very important finance memo:
Planning Tip – You should expect to re-write this finance memo a few times. The first draft is just to get going, so do not hesitate and start early. The second draft is to see if the story makes sense. The third draft is to bring in comments and acceptance from key stakeholders (CEO, Executive Director, Chair of the Board, and Treasurer). The final draft is for tightening up the content and staying on point with a clear message.
One final comment: it is good to consider a theme for the finance memo and repeat the theme in your overall messaging. The theme could be: “Navigating Uncharted Waters”, “Responding to the Unexpected”, “During a Crisis”, “How We Pivoted”, etc. Used correctly, these themes paint a vivid picture that is otherwise hard to describe. Repeating the theme adds a level of context without having to apologize for, or over-explain how decisions were made in response to rapidly changing conditions.