how to determine what is a good non profit organization financials

Summary

Is your potential grantee financially sustainable? In other words, tin it reliably support its core programs and services? What is its financial rails record? Where is it vulnerable?

Strong programs and need for services practise not automatically equate with adequate funding—to the contrary, "success" typically ways more coin is needed! Nonetheless, agreement an system's financial situation is critically important because doing and then will give you lot a articulate line of sight into its long-term prospects, its ability to put boosted funds (yours) to good use, and a sense of where it would (or should) use your support.

This tool runs you through some helpful indicators. Amongst other things, you lot'll be looking to run into that your potential grantee isn't overly reliant on a small number of funders, that it has enough cash on mitt to weather an unexpected storm, and that it has robust financial reporting systems that support audio financial management. If you find that the organization is less financially mature, you'll be considering whether its leaders have a solid plan to achieve a level of financial stability, and whether information technology has the capabilities it needs to put that financial programme to work. Finally, you'll ascertain how well prepared its leaders are to handle changes in expenses and revenues, which often crop up unexpectedly in the nonprofit world.

Your comfort with unlike levels of financial sustainability volition depend in large office on the role you promise to play in the organization'due south trajectory. For example, you lot will likely find less financial sophistication and certainty from a pocket-size, entrepreneurial start-up than from a large, established nonprofit. Merely possibly y'all want to help that smaller organization get off the ground—or mayhap yous desire to help the larger organization expand to new cities. What matters is that you learn enough nearly the arrangement's financials to determine whether your support will be put to good use.

Initial assessment

As you brainstorm your financial research, you'll first want to look out for signs of truthful financial peril. Is the organization in dire straits? Unless you really believe your support will help the system make a dramatic turnaround, you will probably say no to supporting an organization in this state of affairs.

Await for a few central warning signs before yous spend significant fourth dimension doing more intensive financial inquiry. Y'all will want to do this respectfully, agreement that fiscal troubles are a touchy upshot. Instead of working directly with the organization'south leader, for example, you might inquire first to see the organisation's fiscal statements. What can you infer by looking at those reports? You might also ask to be put in impact with a member of the nonprofit's financial direction team or board audit committee.

If you uncover no suggestions of financial jeopardy, go along to gather a more nuanced picture of the organization's business organisation model and how your support might be put to use.

Total financial assessment

An in-depth financial cess examines three components of an system'south financial wellness: financial management, sources of revenue, and cash position.

Recollect of this procedure every bit one more than way of getting to know your potential grantee. If you lot discover vulnerability in its financials, seek the root causes. Await for ways that your support could fundamentally strengthen the nonprofit's financial position. For example, funding an investment in an IT system to provide improve real-fourth dimension financial information could open the door for meliorate financial direction; alternately, funding a development staff position might lead to a marked increment in the organization'due south acquirement.

Financial management

Nonprofit financial management principles turn for-profit principles on their heads. In the nonprofit world, for example, increased need for services oft means an increase in costs (to provide those services) with no associated change in revenue. Such a scenario leaves an organization scrambling for funding to keep upward with need. What's more, nonprofits don't have access to the aforementioned capital markets as for-profit enterprises. That means that they practice non accept the option of selling shares to fund growth or weather condition tough times, but must find funds elsewhere. Given this challenging context, the force of a nonprofit's fiscal management squad is i of the all-time indicators of its power to survive and abound.

The size of the organization'south fiscal direction squad volition vary. A large system may take a dedicated Primary Financial Officeholder (and maybe even staff), with support from selected board members and/or board audit committees and the executive managing director. In a minor organization, the executive director might be flying solo. At that place is no "magic number" of people or positions to expect for; instead, you will likely form an impression of the quality of the staff through your personal interactions. Consider other means of validation equally well—such as the conviction of other funders who take vetted the system. Go on in mind that in younger organizations, sophisticated processes and procedures are less likely to exist established, only the nuts should yet exist in identify to assure sound management.

Regardless of size, at a cardinal level you lot want to hear that the organization has a stiff grasp of how its costs reflect the strategy it is trying to attain. First, how are the organization'southward priorities reflected in its upkeep? For example, if the organization emphasizes the importance of its advocacy piece of work in its strategy, but you come across only minimal expenditures on advocacy, that is a red flag.

2d, what does it really cost the organization to reach results? Understanding how the arrangement thinks about this is a swell way to run across how it translates its strategy into activeness. This line of inquiry doesn't necessarily require a circuitous calculation, but it is a expert idea to approximate how management thinks about costs on a "per beneficiary" or "per effect" basis. If the numbers they share seem wildly high or low, dig deeper to sympathise more about the feasibility of the system's goals.

The organization'southward financial team should exist able to respond a few additional questions (listed beneath), and provide yous with the documents you request. They should also be comfortable seeking input from the board when appropriate. If team members have difficulty with your requests or seem uncomfortable communicating with directors, that's non necessarily a negative indicator; instead, it'due south an opportunity to inquire yourself, "Could I structure a grant to aid the organization hire or train to fill this need?"

Ask the following questions to inform your perspective on an arrangement's financial management:

Fiscal leadership's strength and ability to support the nonprofit'due south strategy

• Who, currently, is responsible for the organization'due south financial strategy? What type of formal education and work experience practise they have?
• Can y'all share how your strategic priorities are reflected in your budget?
• Does the organization have detailed upkeep projections based on what is required by the strategy?
• Does the organization take a clear understanding of its operating costs (for example, has information technology conducted a "truthful cost" analysis, where it has estimated allocations of its central costs to its programs)?
• What resources or programs would you lot add or cut if your acquirement grew or shrunk by ten percent? How flexible are your expenses (for example, do you accept significant capital expenses or debts that require servicing)?

Forcefulness of the nonprofit's financial processes

• Practise the organization's fiscal reporting systems provide the necessary information in a articulate and timely way?
• Does the organisation take systems in identify to evaluate its fiscal progress and refine its budgets and plans? (These might include management reports, or other documents that provide an overview of current financials against program, such as monthly dashboards.)
• How is the board involved in monitoring the organization's fiscal position?
• If the organization has over $500K in revenue, check to make certain it has a recent audit and that you understand the comments.

Revenue sources

Good programs solitary are not enough for an arrangement to attract funding, given that resources exercise not automatically flow to the highest-performing nonprofits. Nonprofits demand to have a strategy to raise acquirement to fund their programs.

Reliable funding sources enable an organisation to identify with a reasonable caste of predictability how much coin it will raise in a given yr. They also allow an organization's financial direction team to recall ahead. In other words, instead of beingness in constant "survival mode," the team can work with the system'due south leadership to set longer-term goals and priorities with conviction in the resource information technology will be able to spend on core programs and services.

Three criteria contribute to the stability and flexibility of an organization's revenue sources, allowing it non simply to enhance dependable funds, simply to put the money where it is most needed:

• The percentage of ongoing costs that are covered by reliable funding sources.
• The number of decision makers in command of revenue sources. Having a greater number of consistent funders increases the likelihood that revenue will proceed fifty-fifty if one funder chooses to exit. This does not prevent an system from earning the majority of its revenue from one blazon of source (for case, authorities contracts), just rather looks at how many split up payers (for case, how many government contracts) are involved within that one blazon of funding.
• The restrictions donors have placed on their funding. When donors restrict funding to certain programs, organizations are non free to allocate money where they demand it most. If a big portion of a nonprofit'south funding is restricted, its power to sustain itself as a whole may be compromised, even if the amount of money in play appears to indicate financial health.

To identify what portion of ongoing costs is covered with reliable funding, you first demand to assess which funding streams are reliable. Speak with members of the financial direction team or the arrangement's leader and inquire them to tell you about the system'southward most dependable funding sources. For example, can the organization generally count on a certain, steadfast set of funders, year later year? Has the organization been able to add together reliable funding sources to keep step with growth? How confident are the arrangement'south leaders that these trends volition continue? If the grant y'all're offering is meaning, you might also consider interviewing other major funders to estimate their level of commitment and long-term interest.

Next, review by operating revenues and costs (looking back three to five years), excluding any "blips" such as old growth or capacity-building investments or major grants. Compare the total reliable revenue identified for each twelvemonth you lot have analyzed with the operating costs for that year. In that location are no strict guidelines equally to the percentage of funds that should be reliable, merely it is an encouraging sign if these types of sources cover at least 70 percentage of ongoing costs.

You'll besides want to notice out how many grants or contracts comprise the bulk of the funding. The organization's fiscal documents should reveal this information; you can also ask the nonprofit's fiscal direction team.

You also want to sympathize how much discretion the arrangement has in how to spend its revenue – what proportion of the budget is restricted for particular programs, for instance? If y'all get the sense that the organization doesn't have the flexibility to allocate resources to its highest priority areas, this might exist something you tin can aid with.

Funding models

As part of the conversation on revenue sources, it may be helpful to understand whether the leader has thought well-nigh a funding model. A funding model is a nonprofit's strategy for attracting a reliable mix of revenue sources to support programs and services. It has 3 defining elements:

• Funding source (the type of funding, such equally a foundation, government, or individuals)
• Funding decision-maker (for example, a foundation program officer, a government purchaser, or an private donor)
• Funder motivation (for example, issue falls under a foundation focus area, organization provides a depression-cost and effective service, individual was personally touched by a affliction)

For more than detail, meet Bridgespan article "X Nonprofit Funding Models."

Most organizations lend themselves to certain types of funding models. For mature organizations, evidence of a clear funding model should be emerging. Many young nonprofits will not have fully established funding models, just ideally they are working towards a coherent, strategic model. You may desire to engage the leaders of younger organizations in a chat to hear if and how they are thinking about which models might fit their organization best.

As you learn more about the organization's most reliable funders, keep its existing (or potential or emerging) funding model in mind. What is the organization'southward rationale for highly-seasoned to each of funder? Where does (or would) each funder fit into the model? (To learn more, read "Finding Your Funding Model.")

Cash position

You will desire to complete your inquiry into the organization'due south financials by confirming it has sufficient cash on hand to pay the bills and weather unexpected challenges.

At a minimum, you will want to understand whether the system:

• Has had difficulty making payroll, currently or in the recent by
• Is falling behind on its rent or debt payments
• Has no bachelor lines of credit
• Is using funds restricted to a specific program to back up core operations instead

After completing this initial assessment of the arrangement'south current situation, information technology is a good thought to understand the organization'southward admission to cash more generally and how it thinks about, from a time perspective, mapping its expenses to its revenues. Greenbacks goes by many unlike names: working capital, operating reserves, and endowments are just a few of the ways accountants organize capital. What'southward really important is the amount of the arrangement'southward liquid avails that can be used for any purposes necessary.

How large a greenbacks reserve does the arrangement demand?

The amount of greenbacks an organization needs to accept on hand depends not just on how much it spends, but also on the timing of its revenues and expenses. Just as a drug company might run into a cash influx when a drug reaches market, a nonprofit might raise the bulk of its donations at an annual dinner, or collect government grants just twice a year. Its expenses volition keep regularly throughout the year, creating a few months when the organization appears to be affluent with cash, and several months when greenbacks seems about to run out. Every bit long equally this flow is regular twelvemonth in and year out, a nonprofit should exist able to plan alee and keep the necessary amount of greenbacks on mitt to make the next payment.

For example, consider a nonprofit that depends upon funding from the land of California, which frequently can't close its budget earlier Oct. The nonprofit must provide services regardless, and so will accumulate expenses for months until it the country pays upwards. In this instance, the nonprofit needs upwards of half dozen months of greenbacks on hand. In a reverse state of affairs, another organization might have over a years' worth of cash in the banking company right after its annual conference (its big revenue generator), but would probable run very depression on cash as it nears its next conference.

Consistent, reliable funding is key. For example, consider a nonprofit that is nearing the end of 4 major grants. While it may announced to have sufficient cash on hand to cover operating expenses for the side by side six months, it may non have a programme in identify to cover expenses one time those grants stop.

Finally, consider alternatives to cash or cash-like assets. Many nonprofits have lines of credit to comprehend their short-term costs—specially nonprofits that rely on government contracts.

A give-and-take about relative fiscal health: Near nonprofits don't come up close to having the greenbacks reserves you would ideally desire to see, at least non all of the time. Proceed in mind that your decision to fund whatsoever given organization should take many factors into consideration in addition to its cash reserves (and that your funding might serve to provide or bolster a reserve.)

Keeping these nuances in mind, there are some basic guidelines that most nonprofits ought to follow.

How much reserve cash is enough?

1 month or less: This organisation faces a meaning risk of a cash flow crisis, and volition continue to do so until this number goes up. An organisation in this position may non actually face a crunch yet, and information technology would be worth finding out when it expects its next revenue and what other sources of capital it can employ to meet current needs—such as debt, a bank loan, or restricted funds intended for a dissimilar purpose. The just way to dig out of this hole is to earn a surplus or to secure an unrestricted contribution.

2 months: This organization should exist able to weather cash-flow issues inside reasonable bounds, such as a major funder delaying a payment by a limited period of time (a month or two). Simply 2 months of capital does not create a buffer against larger challenges, such as the loss of a government contract that supplies a major portion of its revenue.

Iii months or more: This arrangement has a reasonably comfy absorber. Consider information technology a starting point for looking into the timing of the organization'southward revenues and expenses as well as the liquidity of its cash on manus.

How liquid is the system'south cash reserve?

Once you've figured out how much cash the organization has on hand, you'll want to dig deeper into the nature of that cash and its sources. If the capital is entirely restricted to a item program, the organization may non be able to use it to pay hire or cover payroll. In another scenario, the organization might have an endowment that is intended to fund growth, only its leaders may be able to tap into those funds to cover cash period issues in the economic downturn. The bottom line question is this: Does the nonprofit take sufficient greenbacks (or assets that can be hands converted to cash) to comprehend expenses should revenues not come in every bit planned?

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Source: https://www.bridgespan.org/insights/library/philanthropy/nonprofit-due-diligence-donor-decision-tool/in-depth-research-nonprofit-financial-strength

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