When most people think of Annual Reports they usually think of the
corporate variety. Many non-profit organizations, foundations and
charities produce annual reports. These reports can be useful for
assessing the performance of an organization. These "non-corporate"
reports will often consist of 4 sections:
- Chairman of the Board letter
- Description of the charity, causes, actions, accomplishments, etc. of the organization
- Financial statement
- Directors and Officers
A useful place to start in evaluating an organization is the description section. This section should describe the activities of the organization. It should be clear what the organization has accomplished and who it supports.
The list of directors and officers gives some idea who is associated with this organization. Are the directors respected in the community? What association do they have with other organizations and businesses in the community? The size of the board may be worth considering as anything over 15 can make board meetings difficult and unproductive.
The financial statement is one of the most important areas to carefully evaluate. This is often broken into:
- CPA Opinion letter
- Income statement
- Balance sheet
The CPA opinion letter is especially important if there are qualifications. If there are no qualifications, the letter will be short and simply state that the organization has followed standard GAAP rules. If there are qualifications, these should be considered carefully.
The income statement is critical. It shows what money came in and where it
went. The percentage of revenues going to salaries, G&A, management
services and fund-raising expenses are important to consider.
The NCIB (National Charities Information Bureau) recommendations
that organizations spend at least 60% of annual expenses for program
The Balance Sheet shows where funds have been placed over the years.
The NCIB recommends that organizations
have net assets available for the following fiscal year of not more than twice the current year's expenses or the
next year's budget, whichever is higher;
- not have a persistent and/or increasing deficit in unrestricted net assets.
Footnotes are important to read as they can alert the reader to lawsuits, litigation, IRS problems, loans to directors or officers, loans for other purposes and "extraordinary charges".
Most reputable charitable organizations will provide copies
of their annual reports for the asking. It is wise to refrain
from making significant donations to organizations who are not
willing to provide financial information.