Building Donor Trust: Financial Transparency Best Practices

When it comes to generating nonprofit support, trust is everything. It’s the foundation for strong donor relationships. If you want your fundraising to be successful, you have to show your supporters, both new and longtime, that they can be confident they’re supporting a worthy organization.

One way you can build this trust is through financial transparency. After all, donors and grantmakers want to know that you’re using their contributions properly and ethically, and it’s your responsibility to prove that via financial reporting.

To help you get started, let’s walk through some best practices for financial transparency that you can implement to build trust among your donor base.

Lay the foundation through consistent recordkeeping

Being organized is a great start for financial transparency. If you want to report data accurately, your nonprofit should have a process for consistently recording financial information, ensuring that it is neatly categorized.

For nonprofits, there are two major accounting methods for establishing consistent record-keeping: cash accounting and accrual accounting. According to Jitasa’s guide to cash and accrual accounting, the difference between these two methods is that cash accounting recognizes revenue when it’s received and expenses when they’re paid, while accrual accounting recognizes revenue when it’s pledged and expenses when they’re incurred.

In other words, cash accounting tracks the movement of your nonprofit’s cash, while accrual accounting tracks your organization’s financial obligations.

Given this difference, it’s clear that accrual accounting allows for greater transparency, although this method is more involved. Accrual accounting often requires dedicated financial software, and it’s helpful to work with an accountant to make sure you’re implementing this system correctly.

Publicize your nonprofit’s financial information

Financial statements are recurring reports that organizations create internally to summarize accounting data in actionable ways. Nonprofit financial statements come in four types:

• Statement of Activities: This is essentially the nonprofit equivalent of the income statement at a for-profit organization. This statement reports revenue, expenses, and net assets to help with budgeting.

• Statement of Financial Position: This report is also called a balance sheet, and it outlines your nonprofit’s assets, liabilities, and net assets to assess financial health and growth potential.

• Statement of Cash Flows: This report tracks the movement of cash in and out of an organization via operating, investing, and financing activities to keep spending and revenue generation on track.
• Statement of Functional Expenses: This statement is unique to nonprofits—it categorizes expenditures as program, administrative, or fundraising costs to show how spending furthers your mission.

Besides these internal purposes, financial statements are also helpful for transparency if you publish the data within them on your website and incorporate it into your annual report. Often, it’s helpful to contextualize the information within the reports as well, showing how it helped drive your mission forward. For example, rather than simply showing how much money was spent from the latest grant you received, show the funding, then tie it back to the new program you were able to launch with the funds.

Some supporters will want to know more about your nonprofit’s finances than others, so you should use the data in your financial statements to create charts and graphs that provide a high-level overview of your situation. It would also be helpful to have links to the full reports for donors who want more information.

Conduct independent financial audits

Undergoing a nonprofit audit may sound scary, but it’s another opportunity to demonstrate transparency and discover ways to manage funds more effectively at your nonprofit.

The IRS audits nonprofits, but usually only if the organization receives a certain amount of federal funding annually. Most nonprofit audits are instead conducted by an independent auditor. Here’s a simple breakdown of the audit process:

1. Select an auditor. Research firms, read reviews from past clients, and meet with the top candidates to see if they can provide the services you need while staying within your budget.
2. Prepare for your audit. Gather all of the required documentation and make sure all your transactions and reconciliations are completed for the prior year.
3. Undergo the audit. Wait while the auditor reviews the documents and data, then develops a report of what you’re doing well and provides suggestions for improvement.
4. Implement audit recommendations. Once you receive the report, review it with your team and delegate fund management improvement tasks based on the auditor’s suggestions.

Let your supporters know that you’ve undergone an audit and what improvements you’re making as a result to improve transparency. You can do this in several ways, such as sending out an email or letter from a board member or executive, writing a blog post, or publishing the report on your website with your financial statements. Whatever method you choose, make sure that it’s the one that your most loyal funders and donors prefer.

Honor donor-imposed funding restrictions

Some donors want their contributions to be used in a certain way, and when restrictions are set, you have to honor those stipulations. Funds with donor-imposed designations are also known as restricted funds, and they may come in different forms, such as:

• Major Gifts: The largest donations that your nonprofit receives

• Planned Gifts: Donations that are arranged now but will be delivered at a future date

• Endowment Funds: Money that’s set aside and invested to earn revenue to fund a charitable activity

• Grants: Sums of money provided by a foundation or organization to a nonprofit for a specific purpose
• Sponsorships: “A form of support that nonprofits receive from corporations, often to fund specific events, programs, or projects,” as Double the Donation’s corporate sponsorship guide explains.

If you fail to honor these funding restrictions, you might face legal consequences like IRS fines and donor lawsuits. You’ll also have to deal with broken trust and reputation damage—not just with that supporter, but among your entire community.

That’s why you need to be extra careful with these contributions. You should create separate categories for restricted funds in records and reports, allocate them first when budgeting, and provide regular, personalized progress updates to contributors so they understand the exact impact their money has made on your mission.

If you want your nonprofit to succeed and thrive, you must cultivate relationships with your donors that are built on trust. Transparency is your ticket to that confidence, which is why you need to invest in it. If you find that you need technical or professional help with financial management to maximize transparency, don’t hesitate to reach out for it.