How to Analyse Nonprofit Financial Statements
Similar to a for-profit business, being up-to-date with the financial aspects of a nonprofit organisation is important. To find donors for a nonprofit, gain credibility, connect with those seeking volunteer opportunities and to find a charity, find donors online, run your organisation without a hitch and keep your employees and volunteers, it’s vital to assess your financial statements regularly.
Here, we look at how to analyse nonprofit financial statements to help your organisation position itself for long-term success and sustainability
Assets and Liabilities
The assets of an organisation refer to items with a monetary value that can be sold to generate cash if needed. In a nonprofit organisation, assets could be land, building, computers, equipment, furniture, fixtures, inventory, trademarks, patents and investments.
Liabilities are the debts or amounts owed by the nonprofit such as rent, accounts payable and other expenses.
A nonprofit organisation must carefully calculate their fund balance by deducting the liabilities from the assets at the end of each month so that they’re aware of its financial health, position and stability.
A nonprofit without sufficient liquidity may struggle to start new campaigns and programs, while being unable to adapt to unforeseen expenses and financial constraints. Therefore, it’s essential that organisations regularly review their ‘cash on hand’.
Income and Expenditure
Nonprofit organisations use fundraisers, charity events, contributions and sponsors to generate funding for projects and operations. Analysing financial statements and comparing the present and previous year’s income helps figure out whether the organisation is achieving its set targets, goals, and objectives.
If the income is not favourable, look for different means to generate revenue, like selling t-shirts and merchandise related to your organisation or selling advertising space on your websites and social media channels.
Finding out the net operating ratio of income to expenses can help you learn how efficiently and effectively your organisation is using its funds. Always remember, the higher the income, the more cost-effective your organisation will be.
Determine Fundraising Expenses
Nonprofits rely heavily on events like charity auctions, marathons and raffles to raise funds. Planning and executing these events is difficult and involves hefty costs because of planning, staffing, advertising and logistical expenses. In order to determine the efficiency of your organisation’s fundraising, review the expenses on your financial statements to figure out whether the cost of planning the event was worth the income generated.
With nonprofit organisation’s spending a majority of their budget directly towards their mission and cause, it’s important to pay attention to the program expenses and total expenses. Carefully monitoring program expenses can help nonprofit organisations prosper and grow by reducing and increasing their expenses accordingly.
Cash Flow From Operations
When analysing your nonprofit financial statements, make sure you look at cash flow from operations, as this is an accurate depiction of the unrestricted funds of a nonprofit. An organisation that’s effectively operating by covering their overheads and spending generous amounts of money on their programs has a positive cash flow from operations.