Hosted by: Guidestar (http://www.guidestar.org/)
GuideStar has partnered with the Nonprofit Finance Fund (NFF) to develop Financial SCAN, the first data platform to offer a comprehensive, multi-year analysis of a nonprofit’s financial condition. Financial SCAN translates IRS Form 990 data into a standardized, easy-to-understand, and visual analysis. Complete with dashboards, charts, peer comparisons, and an educational guide to assist with interpreting the results, our new resource offers a more comprehensive picture of financial health than is currently widely available.
Presenters: Pamela Jowdy, Senior Product Manager, GuideStar, and Rebecca Thomas, Vice President, Strategy and Innovation, Nonprofit Finance Fund (http://nonprofitfinancefund.org/).
Objectives: To uncover a NP’s comprehensive financial history; NP Financial Analysis 101. NP Finanical SCAN as an elegant solution to inconsistent finanicial evaluation metrics.
Content: The revenue uncertainty of the current economic environment requires some way to communicate financial health. NFF connect NP financ to NP success by connecting funcders to NP’s, improve the flow of money and maximize impact.
Financial focus is important because good financial governance is the core of a successful organization. Other traits such as leadership and development are secondary to good financial management and structure. Long term effectiveness is driven be financial health, but a common language and tools to reveal financial health is lacking in the NP sector.
Understand the Operating Performance (No margin=No mission);
Determine the strenght of the balance sheet: liquid cash to future opportunity ratio (risk management in relationship to future opportunity).
NP Financial Analysis 101:NFF focuses on profitability, revenue dynamics, expense dynamics, composition of balnce sheet and liquidity from two documents:
1.) Income state: Revenue – Expense = Surplus/Deficit: Find out the Revenue dynamics: Where does the money come from? Is it realistic? Is it reliable and repeatable? Expense dynamics (what NP spends on) is less important than well managed.
Finding the bottom line on any NP statement is complicated due to donor imposed restrictions. Net assets reflect the restricted monies and create a false bottom line. So focus on the unrestricted column to locate unrestricted liquidity. Form 990 gives a false impression of how the NP performs because it shows restricted monies.
2.) Balance sheet: Assets – Liabilities = net assets. You have to go to the Balance Sheet to truly account for restricted monies and thus see the NP’s true performance. Understanding a balance sheet requires asking questions about assets and liabilities.
Capital Funding is unfortunately mingled with revenue and distorts the picture of NP performance. The unrestricted surplus may be inflated by capital flows.
Tax status is not a Business Model/: NP;s need to consider full costs and whether revenue is sufficient to cover them. Full costs > Operating Expenses.
Breaking even is never enough: As an indicator Surplus relfects health only when surpluses consistently cover full costs.
Basic Financial Health Metrics: In assessing NP financial health liquidity is king. There must be strategic financial thinking about how to better serve the community. Look at the number of Months of Unrestricted liquid net assets (monies available for operations) . Financial Health is 3+ months of cash and working capital. Moderately health is liquid cash sufficient ot cover the cyclicality of cash flow.
NP Financial Health Checklist:
Operating result are consistently positive.
Full costs are regularly covered by reliable revenue.
Reinvestment in fixed assets to offset depreciation.
Evidence of management of debt.
Liquidity is sufficient to withstand risk and pursue new opportunites.
Pamela Jowdy: NFF’s Online Financial SCAN: Assessing if an organization takes the right steps: Financial self assessment demands time and management resources. NFF shortens that process by looking at 3 Components: Financial Health Dashboard, Graphs & Explanatory Text, and Peer Comparison Dashboard.
Conclusion: Current financial analysis distorts NP performance. It’s important to not focus on one metric but to look at trends over time.
Resources: Guidestar has their schedule and archived webinars at http://www.guidestar.org/rxg/news/webinars/index.aspx. NonProfit Finance Fund has resources and articles at http://nonprofitfinancefund.org/knowledge-advocacy and their Social Currency blog at http://nonprofitfinancefund.org/blog.
Personal Reflection: The tendency for the NP sector to be overly self critical could send this online financial analysis awry. The wide variety of financial structures that must accomodate the myriad of NP organization missions means that many of these organizations will never look right in the NNF lense. The whole point of NP’s is to adapt to changing needs of the community. The approach of the SCAN implies long term oriented financial structure that is static. Maintaining 3 months of complete liquidity and showing positive productivity does not support the experimental room needed for innovation and a “fleet of foot” response to community need.
Also, the NFF SCAN does not account for external economic factors that impact NP finances. For example: 2008 completely rewrote the financial world of both profit and nonprofit financial structure. Few NP’s would have achieved the NFF SCAN healthy status in 2008.
Where I can see the SCAN working really well is to jugde the notoriously non-self critical for-profit sector (FFN, you should expand into investment finance critique). I think the SCAN online tool could save many people from the investment & mortgage frauds and pyramid schemes that are rampant in the U.S. What would happen if U.S. citizens required for-profits to list themselves on the NFF SCAN before handing over investment dollars? What would Madoff’s organization have looked like on the NFF SCAN?