Financial Analysis of Nonprofits

Nonprofit Financial Information Online

In the United States, the IRS requires that all 501c3 organizations file a tax return of sorts. The form nonprofit organizations are required to fill out is called a 990, and as public organizations, these forms are available to the public. Since 1999, organizations that file 990s have been required to provide copies to anyone who requests. Unfortunately, some nonprofits weren’t aware of this, and when asked, they sometimes refused to disclose what they perceived to be private information (although it is NOT).

To ensure that the information is available, the IRS makes information from 990s available through two outlets.

· Guidestar: www.guidestar.org

· National Center for Charitable Statistics: http://nccsdataweb.urban.org/FAQ/index.php?category=31

Guidestar is the place to look if you want a scanned copy of the complete tax return for a single organization. NCCS is a national repository for compiled data on the nonprofit sector in the U.S., but the datasets do not include all of the information from the 990s. While Guidestar makes scanned copies of individual tax returns available, NCCS makes the data from 990s available in a database format. In other words, if I were interested in contributing money to the World Wildlife Fund and wanted to look at their financial information, I’d probably go to Guidestar. However, if I wanted to conduct an analysis of all nonprofit environmental organizations, I’d go to NCCS.

While Guidestar and NCSS are great sources for data, they do not help in evaluating the financial status of an organization. A good online source of evaluating nonprofit organizations is CharityNavigator.org. What makes charity navigator particularly interesting is its use of financial ratios and rating system. The financial ratios for each of these factors is calculated from financial data on each organization’s 990.

Individual Paper 3: Financial Analysis

One technique used to assess an organization’s financial management is ratio analysis, which focuses on mathematical comparisons between or among accounts on a set of financial statements. While an organization’s size must still be taken into account, financial ratios allow a rough comparison of both large and small organizations. For example, looking at the expenses for Marist and Harvard isn’t particularly useful. However, looking at the ratio of program expenses to total expenses allows us to determine how much of each organization’s budget is used for administrative expenses versus mission critical programs. Ratios also represent benchmarks that organizations can use internally to analyze themselves over multiple years. Fortunately for us, IRS form 990 represents a quick-and-dirty set of financial statements for nonprofit organizations in the U.S.

There are many types of financial ratios for evaluating nonprofit organizations. For this assignment we will examine four types:

Efficiency: Efficiency ratios examine an organization’s fundraising and administrative capabilities. Typically efficiency ratios examine how much of an organization’s expenses are used for administrative purposes as compared to program expenses. Efficiency ratios also examine how well an organization fundraises. Does it spend an inordinate amount on fundraising and how much does it actually raise relative to its fundraising expenses?

Profitability: Profitability ratios examine changes in an organization’s surplus or changes in net assets. Profitability analyses typically seek to determine whether an organization has an appropriate surplus relative to its revenues and expenses.

Liquidity: Liquidity analysis examines whether an organization is generating enough cash to support its operations. The lower a liquidity ratio, the greater the risk that an organization will not be able to meet its operating expenses. Organizations with high liquidity ratios may want to consider investing funds for a higher rate of return if they aren’t being used.

Long-term solvency: Long-term solvency examines the long-term financial health of an organization. Solvency ratios typically examine an organization’s assets and debt. Solvency analyses examine how organizations structure debt and whether the organization matches the terms of its debt appropriately with the life of its assets.

Assignment

Part I (70%):

1. Choose three 501c3 organizations with similar missions and download their 990s from www.guidestar.org . These organizations can be similar to your hypothetical organization, or simply three organizations that work in an area of interest to you.

2. Draft a memo to your instructor that analyzes the financial statements using at least one profitability, liquidity and long-term solvency ratio for each organization. Be sure to discuss how the ratios might impact how they would affect the management of your nonprofit organization (see attached Excel table for a sample of how to calculate the ratios from 990s).

3. What other information might you want to use in determining the organization’s health? Why?

Part II (30%):

For your hypothetical organization, write a budget narrative to fund a new program (it can be the one you are trying to fund in the final project or another one, it’s up to you). You should (briefly) describe the new program and discuss how it helps the organization fulfill its mission. For each of the following categories estimate the total amount of funds you will need and how the funds are to be used.

Budget categories:

· Personnel

· Equipment

· Supplies/phone

· Travel

· Indirect costs

· Total costs