How to Get a Full Understanding of Your Nonprofit’s Financial Health
At the year’s end, when you’ve completed the financial statement for your nonprofit, you should review the following points, either as a board or within the board’s finance committee. The answers to these questions will arm you with a clear understanding of your organization’s financial health.
Do the cash and cash equivalents exceed the accounts payable? If so, the organization has enough cash in the bank to pay its immediate bills to vendors.
Do the total current assets exceed the current liabilities? If they do, the organization has enough money readily at hand to cover all its immediate obligations, such as bills and taxes, employee benefits, and loan payments.
How much of the assets are made up of property, equipment, or other durable goods the organization owns and what is the nature of those assets? Some organizations can appear to be financially healthy because their total assets are high, but all those assets are made up of things that would be hard for them to sell.
Does the current liabilities section show a high amount of payroll taxes payable? If so, the organization may be delinquent in paying its taxes.
In the liabilities section, do you see an item for a refundable advance or deferred revenue? If you see this item, it means money paying for a service was given to the organization before the organization provided that service (such as subscription income theatergoers pay in advance of attending performances). Make sure that the organization has sufficient assets — preferably cash — to provide the services it has promised.
Has the organization borrowed money? If so, the amount appears in the liabilities section as a loan or line of credit. Compare its total unrestricted net assets to the total amount borrowed. If the numbers are similar, the organization may have cash at hand but all of it must be repaid to a lender.
The financial statement will be dated, and the answers to the questions you have just asked should give you a good picture of the health of your organization over its entire history leading up to that date.
Now it’s time to look at the statement of activities, which illustrates what happened in the past year. Two simple questions will summarize that story. Look to the bottom of the page to see:
Is the change in net assets a negative or positive number? If it’s negative, the organization lost money in the previous year. If the loss is a high number, ask why it took place. If it’s a modest amount, ask whether it’s part of a downward trend or something that rarely occurs.
Is the number shown for total net assets a positive number? If so, the organization is in a positive financial position (even if it lost money in the past year). That’s good news!