Is it necessary to always produce an annual financial report?

As part of transparency to donors, you should always produce annual accounts which ideally, should be independently audited. These should be visible on the NGO website for any donor to see. The narrative version in the form of an Annual Review does not have to be written every year, but it is good practice to do it annually if you can. 

The annual report should provide a comprehensive overview of the business of the NGO in the past financial year. Usually, a good annual report would include an opening letter from the Chair of the Governing Board. Other sections include a description of the NGO and its aims and objectives, analysis by management of the performance of the organisation with reference to its projects and activities, and then the financial information. If there is a policy on the reserves position of the NGO and how funds are kept, then this would also be stated. 

The annual report provides important business and financial information to donors and investors and other stakeholders. It can be used to highlight the key achievements and successes in the past year and its current and future goals and aims as an organisation. 

The main purpose is to show donors and investors how the money has been spent in the past year. It is an aid to transparency and to show exactly what income came in and what was spent, and how.  All big donors expect to see audited accounts because it shows that accounts have been independently audited and verified. Internal management accounts are usually not sufficient because the income and expenditure cannot be verified in the same way. An independent audit requires the NGO to produce receipts of all income and expenditure and so it really is the best way to reassure donors that an NGO has good financial management, which is crucial for donor loyalty and repeat grants.