You run reports every month, maybe even every week or every day. You look at numbers until you dream about them. You have meetings with your team and your Board to talk about the numbers.
Having detailed information about your organization is critical. However, you have to understand what you are looking for and how to interpret all that data before you can make a true determination about your organization’s financial health.
Supporting Your Mission
The Statement of Functional Expenses will show you the allocation of your expenses across programs, fundraising, and administrative expenses. This is a very important analysis to make, but you need to view this information with an understanding of what is included in your fundraising and administrative expenses, and that these expenses are not inherently bad. It is all too easy to look at a single number for “overhead” and judge how effective that nonprofit is, but that is a short-sighted judgement. There have been many good articles talking about this topic – The Overhead Myth, General Operating Funds, Admin Expenses, and Why We Nonprofits Are Our Own Worst Enemies, A Board Member’s Guide to Nonprofit Overhead – to name just a few. Just make sure you understand what the numbers are telling you before you act on them.
Looking at your Statement of Activities, you can begin to understand if your organization is profitable. And yes, I do mean, “made a profit.” To those outside the NFP world, it probably sounds counter-intuitive. However, we all know that there will be lean times and you have to be prepared (saving 3% each year is a good target).
Other things to consider when you look at your revenue and expenses:
- Does your revenue come from diverse sources? Are there any risks to that revenue stream? As a trend, available grants are becoming fewer, so you need to be prepared.
- Are you regularly covering the full costs of operating your organization each month, or do you find yourself scrambling?
- Have you adjusted your expenses to match fluctuations in your revenue?
Looking to the Future
Looking at your Statement of Financial Position, you need to understand how your assets and liabilities contribute to your financial health.
- Do you have cash to cover upcoming expenses? In other words, what is your liquid ratio (liquid assets/short-term liabilities)?
- A good sign is if you have at least 3 months cash and working capital.
- According to the Nonprofit Finance Fund State of the Sector 2015 survey, 53% of you have 3 months or less.
- Are you maintaining your fixed assets? It can be critical to maintain the infrastructure of your organization.
- Do you have available resources to pursue new opportunities that support your mission?
- Do you have a detailed budget and do you stick to it? As a guide, your actual spending should be within a 10% margin of your budget.
You should always be current and up-to-date with your 941 and 990 filings. The statement reports mentioned above – Activities, Financial Position, and Functional Expense, are just a part of the 990. Completing the rest of the 990 form and filing both forms in a timely manner will keep your organization in good standing.
Understanding the full health of your organization is much more detailed than this blog can get into, but ultimately it involves fully understanding your data and ensuring your sustainability even through the difficult times.