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Overlooked Financial Indicators for Non-Profit Fund Accounting

Posted by Zobrio on November 1, 2014

Non-profit fund accounting is difficult. From fundraising, to operations to pursuing the social mission of the organization, managers often have to wear a lot of hats. And many nonprofits have extremely limited resources to zealously manage every piece of an organization’s finances.

But at the end of the day, the board of directors and major donors frequently request the status of an organization’s finances. When asked to provide detailed information, what kind of information should be provided?

Many non-profit fund accounting efforts are focused on the top line and bottom line. But while these are important measures, boards and donors often want deeper information that that. Here are six often-overlooked financial indicators to include when reporting a nonprofit’s finances.

  1. CONSISTENT, RELIABLE STREAM OF REVENUE: We get it, donations go up and down.Some months and years are leaner than other. However, over time, donations should begin to follow a pattern and become relatively consistent (barring any major push or drive). Boards and donors want to ensure that a steady stream of money consistently flows through the organization.

    Therefore, it would be a good idea to show several years of revenue so relevant parties have an accurate picture of an organization’s fundraising success. That doesn’t mean money has to come from the same people every time, or even for the same amount. But it does mean showing that the organization can pull different levers to get money.

  2. CONSISTENT SURPLUSES: In some ways, non-profit fund accounting mimics that of a business – it should ideally take in more money than it spends. But instead of sharing the leftovers among ownership, the extra money should go back into improving the organization itself.

    So like a business, the nonprofit should try to show its consistent “profitability” – i.e. surpluses. This will assure donors and the board that the organization’s financial managers have been responsible stewards of money. Like the stream of revenue, an organization should also work to show several consistent years of surpluses to put people at ease.

  3. PROGRAM EFFICIENCY RATIO: Simply showing consistent revenues and surpluses won’t cut it for the most scrutinizing boards and donors –they ultimately want to see that as much money as possible goes toward the main mission of the nonprofit. Enter the program efficiency ratio (PER): PER = mission-centric expenses / total organizational expenses

    Of course, some money must go to administrative expenses – how much depends on the organization and its goals. But the organization should set a goal for the percentage of that goes to the mission financial statements should indicate efforts to come as close to this figure as possible.

  4. ABILITY TO CONTROL AND MANAGE DEBT: Of course, organizations can use debt to their advantage in certain situations: purchasing new property, upgrading existing facilities and even managing a temporary cash crunch. However, donors and boards want to ensure that debt loads stay manageable. For transparency, show how much debt the organization has taken on and the interest rates on those loans.

  5. LIQUIDITY: Ample cash reserves ensures organizations can remain financially viable despite changes in circumstances (endowment drop, fewer donations, a building fire, etc.) However, most nonprofits operate with little cash on hand.The most recent State of the Sector Survey by the Nonprofit Finance Fund indicated that 56 percent of respondents expected to have three months of cash on hand or fewer. Unfortunately, this puts nonprofits in a perilous situation when situations go south.

    If possible, join the 44 percent with more cash on hand, and tout that to the board and major donors.

  6. ENDOWMENT PERFORMANCE AND HOLDINGS: Not every nonprofit has a financial endowment. But for those that do (usually larger organizations), it usually plays an imperative role in funding both the mission and operations of the nonprofit. So non-profit boards and major donors deserve to have transparency.

    As much as possible, show the performance of the endowment over a sizable period of time. Make sure the board fully understands how much money gets withdrawn from the endowment to pay for operating expenses, and which parts of the endowment are restricted for certain purposes. Better yet, provide detailed information on the portfolio’s holdings – such as the funds invested and the asset allocation – so that boards and donors feel even more comfortable on where their money goes.

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