How do you evaluate a nonprofit's financial sustainability and resilience?

To evaluate a nonprofit's financial sustainability and resilience, review the three main financial statements: the Statement of Financial Position (balance sheet), the Statement of Activities (income statement), and the Statement of Cash Flows. Analyze liquidity, assets vs. liabilities, revenue diversity, and expense management. Assess cash flow stability and reserves to ensure the nonprofit can weather financial uncertainties. Consistent and transparent financial reporting indicates strong governance and resilience.

1- Revenue Diversity: Check multiple funding sources to mitigate risks. 2- Liquidity Ratios: Measure short-term financial health. 3- Operating Reserves: Ensure 3-6 months of expense coverage. 4- Debt-to-Equity: Assess leverage and stability. 5- Budget Variances: Large deviations suggest planning issues. 6- Fundraising Efficiency: Cost per dollar raised. 7- Program Efficiency: Expenses supporting the mission. 8- Trends: Review multi-year revenue and expense patterns. 9- Scenario Tests: Examine resilience in different situations. 10- Board Oversight: Strong governance ensures sound finances.

To evaluate a nonprofit's financial sustainability and resilience, focus on the three main financial statements: the Statement of Financial Position, which reveals assets, liabilities, and net assets; the Statement of Activities, showing revenue and expenses over time; and the Cash Flow Statement, indicating how well the organization manages its cash. Together, these statements offer a comprehensive view of financial health, liquidity, and the ability to meet both short-term obligations and long-term goals.

> integrate financial metrics with impact measurements, digital maturity assessments, and sustainability factors into a balanced scorecard > regularly perform scenario planning and stress tests to evaluate risk > recruit board members with business expertise and invest in economic literacy programs > diversify funding sources using impact bonds and recoverable grants > communicate financial health to stakeholders using impact-adjusted financial statements to foster a culture of financial transparency > develop strategic partnership opportunities to improve economic resilience through regular network analyses > link monetary inputs to social outcomes by developing a data-driven approach to program evaluation

Un Organisme sans but lucratif a un objectif précis. La viabilité financière et la résilience ne peuvent trouver de sens que quand ces deux atouts cadrent avec l'atteinte documentée des résultats prédéfinis. Intéressant dès lors de mesurer par un indicateur approprié le stock outil financier et l'évaluation des activités des différentes parties prenantes par rapport au suivi du planning de l’Organisme.

Start by examining the organization's assets, including cash, receivables, and investments, to assess liquidity and stability. Next, compare total liabilities, such as debts and obligations, to net assets, which reflect the nonprofit’s financial strength. A high ratio of assets to liabilities indicates better financial health. Lastly, evaluate the composition of net assets, distinguishing between restricted and unrestricted funds to understand the flexibility in resource allocation.

First review the nonprofit’s revenue streams, including donations, grants, and program fees, to assess diversification and reliability. Then, examine the expenses, breaking them down into program services, management, and fundraising. This helps determine how efficiently the nonprofit allocates resources. Finally, compare revenue and expenses over time to evaluate trends in financial performance, ensuring the organization generates a surplus or, at minimum, breaks even. This gives a clear picture of sustainability and operational efficiency.

The IRS puts significant restrictions on the spending of non-profit organizations. At the same time, all US tax returns are publicly available from non-profits. The openness should allow the public to scrutinize non-profits before making donations. One of the most significant points thereby is the use of funds. Donors should focus on how much money is spent on program work, which is the technical name for the charity work, versus all the overhead. Sometimes, it reveals glaring omissions, such as non-profits that barely spend 5% on their mission while handsomely paying their leadership.

To analyze the Statement of Cash Flows, focus on the three sections: operating activities, investing activities, and financing activities. First, assess cash from operating activities to ensure the nonprofit generates sufficient cash to cover its day-to-day operations. Next, review investing activities to understand how the organization is using cash for long-term assets or investments. Finally, examine financing activities, such as donations or loans, to see how the nonprofit funds its growth. Positive cash flow, especially from operations, signals strong financial health and sustainability.

Another valuable source of information that I have found helpful in reviewing the sustainability and viability of nonprofit organizations is the IRS form 990. This takes all of the data and figures from financial records, and presents them in a way that tells the organization story from a different perspective. This publicly disclosed form captures fundraising, activities, and performance. With a five year look back, and presents the allocation of expenses to critical areas like direct program support, administration, and fundraising activities. It discloses any other reporting relationships with other entities. It’s an incredibly powerful tool, along with the other financial performance data for assessing non profits.

1. Financial Statements:Review key statements for overall health. 2. Liquidity Ratios: Check ability to cover short-term debts; higher ratios are favorable. 3. Debt Ratios:A lower debt-to-equity ratio suggests financial prudence. 4. Operating Reserves:Determine how long reserves sustain operations. 5. Revenue Diversification:A varied revenue mix ensures less dependency. 6. Fundraising Efficiency:Lower costs per dollar raised indicate efficiency. 7. Program Expense Ratio: High ratios show more funds for the mission. 8. Trend Analysis: Examine multi-year financial patterns. 9. External Factors:Consider economic and sector-specific challenges. 10. Governance:Strong leadership and planning enhance resilience.

One of the most common accountability issues for Non For Profits is that, in the absence of shareholders, the board may struggle to identify to whom it should be accountable. The ‘members’ (eg the guarantors in the company limited by guarantee) of the NFP are generally not significant stakeholders because their role is one of legal necessity rather than functionality. Also, by their nature, NFPs often have boards of directors with members who may not be familiar with principles and practices of good governance and/or their legal obligations. Access to good professional guidance, training and mentoring is important, since the obligations which directors face are identical to those to which all directors of public companies are liable.

However, all non-profits are not created equal. Some have stronger and more supportive boards than others. It is also important to understand the cycle of your board of directors and if they are committed to the financial well being of the organization. The history of the financials tell a story by numbers, so do not ignore the story. Some historically well funded nonprofits may not be as healthy as perceived if revenue is not diversified or if a single event can severely alter the financial position of the organization. If an organization has a strong mission deemed necessary in communities it serves, a board must align investment to a strategic vision that will indeed attract and sustain needed revenue over time.

NGOs are usually dependent on institutional donors (governments, international organizations, foundations, larger NGOs, etc.) for the largest part of their budget, which means that a change in their donor's strategy or priority can cause deep financial trouble. In order to avoid putting one's eggs into the same basket, these donors need to be as diversified as possible in terms of type, geography, focus, size, etc. In addition, run scenarios on how you would modify your activities if you were to lose your top donor, your second highest donor, etc. In parallel, autonomous funding sources need to be developped. Being an NGO doesn't prevent you from charging for products/services, as long as this money is reinvested into the NGO's mission.