Nonprofit Financial Health:

New Tools for Analysis

3 May 2012

2012, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned by GuideStar USA and is protected by United States and international copyright law.

Todays Facilitators
Rebecca Thomas Vice President and Product Manager, NFF

Scott Menzel Product and Customer Experience Manager, GuideStar

Pamela Jowdy Senior Product Manager, GuideStar

Participant Poll

#financialscan

Todays Objectives
1. The Challenge: Uncovering a nonprofits comprehensive financial story
Why it matters Why now?

2. Nonprofit Financial Analysis 101: Considerations and best practices

Assessing nonprofit financial health in five steps Income Statement and Balance Sheet demystified Profitability and Liquidity guidelines Financial Health Checklist

3. Financial SCAN: Anatomy of a Solution 4. Q & A #financialscan

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The Challenge:
Uncovering a nonprofits comprehensive financial story

#financialscan

#financialscan

#financialscan

#financialscan

#financialscan

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Nonprofit Financial Analysis 101:

Considerations and Best Practices

#financialscan

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#financialscan

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Five Steps to Assessing a Nonprofits Financial Health

1. Profitability 2. Revenue Dynamics 3. Expense Dynamics 4. Composition of Balance Sheet 5. Liquidity

nonprofitfinancefund.org 2012 Nonprofit Finance Fund

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Understanding Operating Performance: Statement of Activities/Income Statement

Revenue Dynamics

Where does the organizations money come from? Is it reasonably diversified? Is it at risk? Do revenue streams appear reliable / consistent?

Expense Dynamics

How have expenses fluctuated over time? Are expenses adjusted in line with changes in

revenue?

Does the organization regularly cover its full costs

Profitability

with unrestricted revenue?

Is the agency saving? If so, is it enough

nonprofitfinancefund.org 2012 Nonprofit Finance Fund

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Where Do I Find the Bottom Line? (Audits & Internals)

Years ended June 30, 2008 ($ in thousands)

ABC Center Statement of Activities

Unrestricted

Operating Activity
Temp. Restricted

Perm. Restricted

Total

Revenues, Gains and Other Support Support Foundations Government Corporations Individuals Total Support Investment Income Tickets, Dues, Other Net Assets Released from Restriction Total Revenue, Gains and Other Support Operating Expenses Program Services Supporting Services Administrative Development Total Supporting Services Total Expenses

113 57 49 248 467 7 484 749 1,707

58 58 -749 -691

171 57 49 248 525 7 484 1,016

1,004 209 49 258 1,262

1,004 209 49 258 1,262

Change in Net Assets

nonprofitfinancefund.org 2012 Nonprofit Finance Fund

445

-691

-246
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Where Do I Find the Bottom Line? (Form 990: Not on the Income Statement!)
Statement of Revenue: Sample Form 990

Statement of Functional Expenses: Sample Form 990

Total revenue $4,106,969

Total expense $4,157,997 Surplus/(Deficit) ($51,028)

nonprofitfinancefund.org 2012 Nonprofit Finance Fund

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Where Do I Find the Bottom Line? (Form 990: On the Balance Sheet!)

Balance Sheet from Sample Form 990

B.O.Y. B.O.Y. E.O.Y.

Unrestricted net assets (end of year) Unrestricted net assets (beginning of year) Change in unrestricted net assets

$3,527,235 $3,770,516

($243,281)

nonprofitfinancefund.org 2012 Nonprofit Finance Fund

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Beware! Unusual Large Surpluses May Reflect Capital

Unrestricted Revenue & Expenses (including non-operating)
1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2008 2009 2010 2011 2012 2013 ($ in thousands)

Operating Revenue & Expenses

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2008 2009 2010 2011 2012 2013 ($ in thousands)

Revenue, including non-operating

Expenses (before depreciation)

Audits rarely, and 990s never, segregate capital (i.e., for fixed asset purchases) from revenue. The unrestricted surplus may be inflated by these capital flows.

nonprofitfinancefund.org 2012 Nonprofit Finance Fund

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Surplus Size Matters: Breaking Even is Never Enough

Like any organization, nonprofits need to cover the full cost of delivering programs
Tax Status is NOT a Business Model Full costs > Operating Expenses

Full costs include: 10

Operating Expenses Fixed Asset Additions

10

Debt Principal

Depreciation

Working Capital

Reserves

10

10

nonprofitfinancefund.org 2012 Nonprofit Finance Fund

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METRIC - Operating Results: A Guideline

Financial Indicator

Healthy

Moderately Healthy

Requires Immediate Attention

Unrestricted Surplus/Deficit (as % of expenses)

Surpluses consistently cover full costs, contributing to healthy balance sheet and savings (3%+)

Breakeven results or periodic surpluses insufficient to cover full costs (-3% to +3%)

Consistent and/or growing deficits (-3%+)

nonprofitfinancefund.org 2012 Nonprofit Finance Fund

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Understanding Balance Sheet Health: Statement of Position

Assets
Cash How much? How liquid? Receivables Are they slow to collect? Fixed Assets Are fixed assets being maintained?

Liabilities

Line of Credit Is cash flow being managed

through a line of credit? Appropriately?

Debt Is there a plan for repayment?

Balance Sheet Liabiliti Asse es ts Net Assets

Net Assets & Reserves

Unrestricted Net Assets Does the nonprofit

own more than it owes? How much is liquid? fully support core programs?

Temporarily Restricted Net Assets Do they Reserves Any reserves? Suitable to needs?

nonprofitfinancefund.org 2012 Nonprofit Finance Fund

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Measuring Liquidity (Take-Home)

Months of Cash =

Total Cash (Total Expenses / 12)

Months of Unrestricted Liquid Net Assets = portion of net assets available for operations Working Capital =

Unrestricted Net Assets (PPE PPE Debt) (Total Expenses / 12)

Current Assets Current Liabilities

nonprofitfinancefund.org 2012 Nonprofit Finance Fund

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METRICS - Liquidity: A Guideline

Financial Indicator

Healthy
3+ months cash and working capital

Moderately Healthy

Requires Immediate Attention

Months of Liquidity

Sufficient to cover cyclicality Less than one of cash flow month and One ore more board (aim for 3 declining designated reserves months) for risk or opportunity

Risk Cash = Crisis

nonprofitfinancefund.org 2012 Nonprofit Finance Fund 23

A Financial Health Checklist

Operating results are consistently positive (surpluses!) Full costs are regularly covered by reliable revenue Reinvestment in fixed assets to offset depreciation Evidence of ability to manage debt Liquidity is sufficient to withstand risk and pursue new opportunities

nonprofitfinancefund.org 2012 Nonprofit Finance Fund

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Is there a right answer?

#financialscan

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Financial SCAN :
SM

Anatomy of a solution

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#financialscan

An annual financial check-up for review at management and board levels Visual and compelling report for communicating financial story and funding requirements Historical context to inform the annual budgeting process and strategic/business planning A quick way to inform consultants engaged for financial planning and other capacity-building efforts A training resource for new executives 27 and board members

An annual financial check-up before fund allocation Grantee and potential grantee peer benchmarking Clear visual representation of financial trends with a guide for interpreting results: program officer education Engage grantees in dialogue about their financial health and resource needs Documentation to support recommendations to boards 28

Charitable Giving Planning: Wealth Managers can use Financial SCAN to present grantee recommendations to individual clients in a consistent, sophisticated way. NPO Asset Management: Inform the development of income generation strategies and investment policy statement development for existing nonprofit clients. New Business Acquisition: Identify new nonprofit clients and use the comprehensive report as part of a pitch book to prospective nonprofit and high net worth individual clients.

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#financialscan

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31-Page PDF Report

Financial Health Dashboard 13 Graphs with accompanying narrative and questions to consider Peer Comparables Dashboard Glossary and Definitions Date and time stamped All data sourced directly from Forms 990
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Financial SCAN Demonstration

Online Report Generation

#financialscan

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Recap
Financial Health Dashboard 13 Graphs with accompanying narrative and questions to consider Peer Comparables Dashboard Glossary and Definitions Date and time stamped All data sourced directly from Forms 990

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Common Questions
1. I am a nonprofit and only want to run a report on my own organization once or twice per year. Is there a Financial SCAN product for nonprofits? 2. How big is the Financial SCAN universe? 3. How does Financial SCAN handle cases where a target organization does not have 5 years of data? 4. Does Financial SCAN include mission and impact data?

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#financialscan

Product Information and Questions

www.guidestar.org/financialscan webinars@guidestar.org
This innovative new tool builds the financial management capacity of nonprofits and helps grantmakers engage with their grantees about financial health and funding needs. By creating a new standard for nonprofit financial analysis, the Financial SCAN underscores the relationship between strong finances and effective programs.

-- Kathy Reich, Director or Organizational Effectiveness Grantmaking

David & Lucile Packard Foundation Financial SCAN Funder

#financialscan

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The Backup
Appendix

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GuideStar USA
www.guidestar.org
Founded in 1994 Offices: Washington, DC and Williamsburg, VA 1.8 million organizations in the GuideStar database 18,554 nonprofits voluntarily provide information via GuideStar Exchange More than 6 million Form 990 images in the GuideStar database 8.3 million annual visitors to the GuideStar website 803,256 newsletter subscribers $11 million operating budget

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Financial Health Dashboard

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#financialscan

Graphs, Narrative and Questions to Consider

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Peer Comparables Dashboard

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Nonprofit Financial Health:

New Tools for Analysis
3 May 2012

2012, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned by GuideStar USA and is protected by United States and international copyright law.

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