Annual Reports - Do they matter?

In my endeavors to identify ways to maximize efforts and outcomes for small nonprofits, I found myself exploring the value of annual reports.

My assumption, when I started this investigation, was that annual reports take a lot of time and energy to create without much of an impact on a nonprofit’s ability to raise funds.  

But it was admittedly an unscientific and untested opinion.

So I started asking a few friends who work in the nonprofit fundraising and financial space whether they believed annual reports made a difference in fundraising for nonprofits. The responses were mixed. 

One financial expert called annual reports “puff pieces.” Another said they were a “big waste of money.”

A development colleague dissented, saying they were an important part of acknowledging donors for their contributions. And even another said, they absolutely matter but should focus on impact rather than acknowledgement.

The literature wasn’t much more helpful in shedding light on the matter.

While I was able to find information on HOW to write an annual report and what should be included, in terms of the impact an annual report has on the success of fundraising, I was only able to find one study with a data set from 2008.  The study stated that there was a positive correlation between annual reports and donation levels. However, this analysis did not make the distinction between annual reports and general “performance disclosures.”  

Still seeking answers, I decided to do some data analysis of my own. Pulling data from Los Angeles nonprofits serving people experiencing homelessness and reporting a budget of less than $4 million, I looked at eight nonprofits with annual reports and eight nonprofits without annual report and compared their contributions and fundraising event lines on their Form 990s.  This was admittedly a small “n” number, as they say in statistics, but the findings were definitive. 

Annual reports make a difference in fundraising amounts. 

See the graph below:

Even in this small sample size, the difference that annual reports make is pronounced.  Agencies with annual reports were able to acquire 43% more of their budget in areas of contributions and gifts than agencies without annual reports. The distinction is even more extreme when looking at fundraising events. Agencies with annual reports raised five times the amount of money at their fundraising events than agencies without.

Of course, with such a small sample size, there could be many factors at play that could account for these differences.

One could argue that strong fundraising teams tend to create annual reports, rather than strong annual reports create strong fundraising. However, it does appear that annual reports matter to fundraising efforts.

Here is the rub – annual reports are costly and require a large amount of staff time and staff skills to put together. They assume that an agency already has a robust data tracking system to report on impact, a communications team to pull together appealing content, and a design team to ensure the report is visually appealing.

In other words, for small nonprofits, they may be impossible to justify. 

So what are small nonprofits to do?

Well, it depends on an agency’s development capacity, and it depends on the ability to get the annual report into the hands of funders.

Nevertheless, if the resources to create an annual report are limited, there are two components of an annual report that should not be ignored:

1.      acknowledging donors; and

2.      demonstrating and communicating impact.

The good news is that there are cost-effective ways to address these two components without overburdening small nonprofits (e.g. a phone call, social media post, impact landing pages, etc.).

So, should nonprofits spend resources on creating an annual report?

Here is what I would say after all of my investigation:

Maybe.