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GuideStar webinar on 05/13/12. Presenters: Pamela Jowdy, Senior Product Manager, GuideStar, and Rebecca Thomas, Vice President, Strategy and Innovation, Nonprofit Finance Fund http://www2.guidestar.org/rxg/news/webinars/webinar-archive.aspx
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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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Rebecca Thomas
Vice President and Product Manager, NFF
Scott Menzel
Product and Customer Experience Manager, GuideStar
Pamela Jowdy
Senior Product Manager, GuideStar
Today’s Facilitators
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Participant Poll
#financialscan
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1. The Challenge: Uncovering a nonprofit’s 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
Today’s Objectives
#financialscan
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The Challenge:Uncovering a nonprofit’s comprehensive financial story
#financialscan
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7#financialscan
8#financialscan
9#financialscan
10#financialscan
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Nonprofit Financial Analysis 101:Considerations and Best Practices
#financialscan
12#financialscan
13nonprofitfinancefund.org ©2012 Nonprofit Finance Fund®
Five Steps to Assessing a Nonprofit’s Financial Health
1. Profitability
2. Revenue Dynamics
3. Expense Dynamics
4. Composition of Balance Sheet
5. Liquidity
14nonprofitfinancefund.org ©2012 Nonprofit Finance Fund®
Revenue Dynamics
Where does the organization’s 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?
Profitability Does the organization regularly cover its full costs
with unrestricted revenue? Is the agency saving? If so, is it enough
Understanding Operating Performance: Statement of Activities/Income Statement
15nonprofitfinancefund.org ©2012 Nonprofit Finance Fund®
ABC Center Statement of ActivitiesYears ended June 30, 2008 ($ in thousands)
Unrestricted Temp.Restricted
Perm.Restricted
Total
Revenues, Gains and Other SupportSupportFoundations 113 58 – 171Government 57 – – 57Corporations 49 – – 49Individuals 248 – – 248Total Support 467 58 – 525Investment Income 7 – – 7Tickets, Dues, Other 484 – – 484Net Assets Released from Restriction 749 -749 – –Total Revenue, Gains and Other Support 1,707 -691 – 1,016
Operating ExpensesProgram Services 1,004 – – 1,004Supporting Services Administrative 209 – – 209Development 49 – – 49Total Supporting Services 258 – – 258Total Expenses 1,262 – – 1,262
Change in Net Assets 445 -691 – -246
Operating Activity
Where Do I Find the Bottom Line? (Audits & Internals)
16nonprofitfinancefund.org ©2012 Nonprofit Finance Fund®
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)
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Balance Sheet from Sample Form 990B.O.Y. E.O.Y.
Change in unrestricted net assets
Unrestricted net assets (end of year) $3,527,235
Unrestricted net assets (beginning of year) $3,770,516
($243,281)
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Where Do I Find the Bottom Line? (Form 990: On the Balance Sheet!)
B.O.Y.
18nonprofitfinancefund.org ©2012 Nonprofit Finance Fund®
Beware! Unusual Large Surpluses May Reflect Capital
Audits rarely, and 990s never, segregate capital (i.e., for fixed asset purchases) from revenue. The unrestricted surplus may be inflated by these capital flows.
Unrestricted Revenue & Expenses (including non-operating)($ in thousands)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2008 2009 2010 2011 2012 2013
Revenue, including non-operating Expenses (before depreciation)
Operating Revenue & Expenses($ in thousands)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2008 2009 2010 2011 2012 2013
19nonprofitfinancefund.org ©2012 Nonprofit Finance Fund®
Surplus Size Matters:Breaking Even is Never Enough
Like any organization, nonprofits need to cover the ‘full cost’ of delivering programsTax Status is NOT a Business ModelFull costs > Operating Expenses
Full costs include:
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1
1010
0
10
Operating Expenses
Fixed Asset Additions
Debt Principal
Working Capital Reserves
Depreciation
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Financial Indicator Healthy Moderately
Healthy
Requires Immediate Attention
UnrestrictedSurplus/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%+)
METRIC - Operating Results: A Guideline
21nonprofitfinancefund.org ©2012 Nonprofit Finance Fund®
Understanding Balance Sheet Health: Statement of Position
Balance Sheet
Assets
LiabilitiesNet Assets
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?
Net Assets & Reserves
Unrestricted Net Assets – Does the nonprofit own more than it owes? How much is liquid?
Temporarily Restricted Net Assets – Do they fully support core programs?
Reserves – Any reserves? Suitable to needs?
22nonprofitfinancefund.org ©2012 Nonprofit Finance Fund®
Months of Cash =Total Cash
(Total Expenses / 12)
Months of Unrestricted Liquid Net Assets =
portion of net assets available for operations
Unrestricted Net Assets –(PPE – PPE Debt)
(Total Expenses / 12)
Working Capital = Current Assets – Current Liabilities
Measuring Liquidity (Take-Home)
23nonprofitfinancefund.org ©2012 Nonprofit Finance Fund®
Financial Indicator Healthy Moderately
Healthy
Requires Immediate Attention
Months of Liquidity
3+ months cash and working capital
One ore more board designated reserves
for risk or opportunity
Sufficient to cover cyclicality
of cash flow (aim for 3 months)
Less than one month and declining
METRICS - Liquidity: A Guideline
Risk – Cash = Crisis
24nonprofitfinancefund.org ©2012 Nonprofit Finance Fund®
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 riskand pursue new opportunities
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Is there a “right” answer?
#financialscan
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Financial SCANSM:Anatomy of a solution
#financialscan
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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 and board members
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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
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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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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 DemonstrationOnline 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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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?
Common Questions
#financialscan
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Product Information and Questions
#financialscan
www.guidestar.org/financialscan
“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 GrantmakingDavid & Lucile Packard Foundation
Financial SCAN Funder
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The BackupAppendix
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www.guidestar.orgGuideStar USA
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
#financialscan
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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.