Discussion Question: How do you measure the financial health of your organization and how does knowing this information help the nonprofit? What types of reporting are recommended and what do they show you?
Judy’s Post:
There are several ways to measure the financial health of a nonprofit with one of them being to maintain an understanding of key financial metrics which should be regularly reviewed. Understanding these key financial metrics presents an opportunity to gauge the financial health and status of the organization. By implementing frequent analysis of the key financial ratios, one can communicate financial information more effectively and help others understand the nonprofit’s financial health, an important component of building a stronger and thriving nonprofit. It is important to consider these questions which should be asked when determining the financial health of a nonprofit: are your financial resources applied efficiently and effectively to support the organization’s mission? What funding are available to support the organization’s mission?
Using monthly, quarterly, or even yearly financial ratio analysis can help one get ahead in the numbers game by providing valuable insight into the organization’s financial future. By using this tool, one can identify strengths and weaknesses — and take appropriate action to help the organization achieve its mission
One useful measurement tool is financial ratio analysis. It involves taking data from your financial statements, using it to calculate ratios appropriate for your not-for-profit, and then benchmarking those ratios against past performance, management objectives or other organizations. (www.cbiz.com)
Stephanie’s Post:
Cost coverage may just be the most important, all-encompassing indicator of an organizations financial health. It is especially important for nonprofits to cover their full operating and service expenses. If a nonprofit is consistently unable to cover their costs, the nonprofit will see deficit & will not succeed. In breaking down cost coverage… revenue reliability and surplus are essential to the financial health of a nonprofit.
Revenue reliability is the organizations consistent, recurring, and near certain revenue. Year to year, there should be a level of expected income- which is why this financial indicator requires organizational tenor. This reliable revenue promotes cost coverage and contributes to surplus.
Revenue Surplus is positive operating costs; bringing in more money than was spent. Depending on the type of surplus funds (restricted, unrestricted) surplus can be used to pay debt, invest in the organization and/or mission, reward staff/volunteers, and sometimes can be saved.
Nonprofits are required to provide financial statements. Organizations utilize balance sheets, income statements, records of cash flow and expenses. This reporting breaks down organizational expenses, income and donations into categories such as operational expenses program expenses& income, employee expenses, marketing and fundraising expenses & income. Overall, this helps the organization track what’s coming in, what’s going out, and prevents the organization of fines and/or decreased grants.
Nicole’s Post:
Understanding the financial health of your organization is equally as important as maintaining that the mission is continually aligned with the programs of the organization. Not every member of the staff needs to be savvy with financials, but all should fulfill the expectations to maintain proper bookkeeping. Proper bookkeeping makes it possible to understand the financial health of the organization which includes providing pertinent reports for interested parties. By understanding the ongoing income and expenses of the organization you can better understand the “why” behind fundraising initiatives. The organization cannot continue to operate or develop programs without being fiscally healthy and responsible. The profit and loss statements should be shared with the board of directors and staff monthly. Any areas of concern should be addressed before they become an issue which outwardly impacts the organization. The reputation of the organization will be jeopardized if they overpromise and under deliver based on financial stipulations. By keeping sound financial records, the organization will properly allocate funding in a “restricted” and “unrestricted” manner.
Specific strategies to measure the financial health of the organization include referring to a budget, tracking income and expenses through the accrual method, categorizing income, categorizing expenses, tracking unrelated business income, and continually tracking pledges and donations. To manage this daunting task, it is best to utilize bookkeeping software such as QuickBooks or Sage 50clouding Accounting. Through these strategies it is easier to create income statements and cash flow projections. Both are recommended (and necessary!) to truly understand the spending habits, fundraising, and future financial health of the organization. The profit and loss statement shows whether the revenues were higher or lower than the expenses. This helps to identify what operations the organization needs to adjust to stay on budget. This could be reevaluating the impact of an ongoing fundraising initiative or decreasing the spending of a specific expense. The cash flow projection demonstrates whether the organization has enough cash to pay for its costs of operation. Being fiscally responsible is multi-faceted while being an ongoing focus of a non-profit organization.
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