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How To Analyze Key Financial Reports
To analyze a nonprofit Statement of Financial Position (essentially their balance sheet), focus on key areas like: comparing asset values to liabilities, examining the composition of net assets (restricted vs. unrestricted), assessing liquidity by looking at current assets, evaluating the level of debt, and analyzing trends in net assets over time to understand the organization’s overall financial health and ability to meet obligations.
Key components to analyze:
  • Assets:
    • Current Assets: Cash, accounts receivable, inventory – indicates the organization’s short-term liquidity.
    • Non-current Assets: Property, plant, equipment, investments – reflects the organization’s long-term assets.
  • Liabilities:
    • Current Liabilities: Accounts payable, short-term loans – shows immediate debt obligations.
    • Non-current Liabilities: Long-term loans, deferred revenue – reflects long-term debt commitments.
  • Net Assets:
    • Unrestricted Net Assets: Funds available for general operations.
    • Temporarily Restricted Net Assets: Funds with specific donor restrictions that can be used for designated purposes once conditions are met.
    • Permanently Restricted Net Assets: Funds with donor restrictions that must be invested in perpetuity, with only the earnings used for operations.
Important considerations when analyzing:
  • Liquidity Ratios:
Calculate ratios like the current ratio (current assets divided by current liabilities) to assess the organization’s ability to meet short-term obligations.
  • Debt-to-Asset Ratio:
Evaluate the proportion of debt relative to total assets to gauge the organization’s financial leverage.
  • Trend Analysis:
Compare the Statement of Financial Position data across multiple reporting periods to identify positive or negative trends in the organization’s financial health.
  • Donor Restrictions:
Carefully review the breakdown of net assets by restriction level to understand how much flexibility the organization has in using its funds.
  • Comparison to Industry Benchmarks:
Compare the organization’s financial metrics to similar nonprofits in the sector to gauge relative performance.
Key questions to ask when analyzing a nonprofit Statement of Financial Position:
  • Does the organization have sufficient liquid assets to cover short-term expenses?
  • How much of the organization’s funding is restricted by donors?
  • Are there significant changes in net assets from the previous reporting period, and if so, what are the reasons?
  • How much debt does the organization carry, and is it manageable?
  • What is the organization’s overall financial stability based on the analysis of its assets and liabilities?
How to analyze a nonprofit statement of activities
To analyze a nonprofit statement of activities, focus on the breakdown of revenue and expenses, particularly between restricted and unrestricted funds, comparing changes in revenue and expenses over time, identifying trends in funding sources, and evaluating the overall change in net assets to understand the organization’s financial health and sustainability.
Key points to consider when analyzing a nonprofit statement of activities:
  • Revenue Breakdown:
    • Restricted vs. Unrestricted: Analyze the proportion of revenue coming from restricted (designated for specific purposes) versus unrestricted (can be used for general operations) sources.
    • Funding Sources: Identify the primary sources of revenue like donations, grants, membership fees, program fees, and investment income.
    • Revenue Trends: Compare revenue figures from previous periods to identify growth, decline, or significant fluctuations.
  • Expense Breakdown:
    • Program Expenses: Evaluate the majority of spending allocated towards the organization’s core programs and services.
    • Fundraising Expenses: Examine the costs associated with raising funds, ensuring they are proportionate to the revenue generated.
    • Administrative Expenses: Assess the level of spending on general operations like staff salaries, office rent, and utilities.
    • Expense Trends: Analyze changes in expense categories over time to identify areas of potential cost reduction or increased needs.
  • Net Asset Analysis:
    • Change in Net Assets: Calculate the change in net assets by subtracting total expenses from total revenue, indicating the organization’s overall financial performance.
    • Net Asset Classification: Review how the net assets are categorized (unrestricted, temporarily restricted, permanently restricted) to understand the limitations on fund usage.
  • Comparative Analysis:
    • Budget vs. Actual: Compare the actual revenue and expenses reported on the statement to the organization’s budget to identify variances and potential issues.
    • Industry Benchmarks: Consider comparing the organization’s financial metrics to industry benchmarks for similar nonprofits to gauge relative performance.
Important questions to ask when analyzing a nonprofit statement of activities:
  • How reliant is the organization on a single major donor or funding source?
  • Are there significant changes in revenue or expense patterns that require further investigation?
  • Are program expenses efficiently managed compared to administrative costs?
  • Does the organization have a healthy level of unrestricted net assets to cover operational needs?
  • How well does the organization manage restricted funds according to donor intent?
By carefully analyzing the information presented on a nonprofit statement of activities, stakeholders can gain valuable insights into the organization’s financial health, program effectiveness, and overall sustainability.
How to analyze a nonprofit statement of cash flow
To analyze a nonprofit statement of cash flow, focus on the three primary sections: operating activities, investing activities, and financing activities, assessing the cash flow generated from each area to understand the organization’s overall liquidity and ability to cover expenses, reinvest in assets, and manage debt, while considering trends over time and comparing them to the organization’s budget and mission goals; look for significant changes in cash flow and investigate the underlying causes.
Key points to consider when analyzing a nonprofit cash flow statement:
  • Operating Activities:
    • Net Cash Provided by Operating Activities: A positive number indicates the core operations are generating enough cash to sustain the organization, while a negative number might signify potential financial strain.
    • Major contributors to cash flow: Analyze the major components of operating cash flow like donations, grants, program fees, and key expenses to identify areas where adjustments might be needed.
    • Seasonal fluctuations: Check for seasonal trends in cash flow to plan for periods of high or low income.
  • Investing Activities:
    • Cash used for investments: Evaluate if the organization is reinvesting in its future by purchasing long-term assets like property or equipment.
    • Significant asset sales: Analyze the reasons behind large asset sales and their impact on cash flow.
  • Financing Activities:
    • New debt taken on: Assess whether the organization is taking on additional debt to fund operations and the potential impact on future cash flow.
    • Loan repayments: Evaluate the organization’s ability to manage debt by looking at loan repayment patterns.
Important aspects to consider when analyzing a nonprofit cash flow statement:
  • Trend analysis:
Compare cash flow data over multiple periods to identify positive or negative trends and potential areas of concern.
  • Cash flow ratios:
Calculate relevant ratios like the operating cash flow ratio to assess the organization’s liquidity and ability to cover debt obligations.
  • Budget comparison:
Compare the actual cash flow to the budgeted amounts to identify variances and potential areas for improvement.
Questions to ask when analyzing a nonprofit cash flow statement:
  • Does the organization have enough cash to cover current expenses?
  • Are there any significant changes in cash flow from one period to the next, and if so, what are the reasons?
  • Is the organization effectively managing its investments and debt?
  • Are there opportunities to improve cash flow by optimizing fundraising strategies or managing expenses?
  • How does the organization’s cash flow align with its strategic goals and mission?
By carefully analyzing a nonprofit’s cash flow statement, stakeholders can gain valuable insights into the organization’s financial health, identify areas for improvement, and make informed decisions about future funding and operations.