What does a statement of activities tell you about a nonprofit? How should you use it to evaluate the organization’s performance? Unlike a for-profit, which focuses on making money, a nonprofit is focused on accomplishing a mission. Because of this, financial statements won’t tell the whole picture, and you want to consider financial performance in light of how well the organization is achieving its work. That being said, financial statements will tell you how strong of a foundation the organization has, if it’s prepared to invest in future work, and leveraging its assets effectively towards the results it desires.
The most basic question you’ll ask about the Statement of Activities is whether the organization is taking in enough revenue to cover its expenses and build up savings. A growing organization may use its savings to invest in new programs or an expansion but the long-term trend should be for programs to cover their costs with the revenue they take in, and allow the organization to build up savings.
Within revenue, you want to recognize the impact of donor restrictions on your work. Some funds will be limited to pay for specific programs, or can only be spent in a certain time frame. Pay attention to how this will impact your liquidity. Some grants and contracts also limit how much overhead, or indirect costs, you can charge; is the indirect rate covered by the grant higher or lower than your actual costs? If it’s lower, you’ll be able to absorb the shortfall if you have savings built up, but don’t rely heavily on these grants.
If a large portion of your revenue comes from a single type of revenue, or a small number of contributors, consider if you need to diversify your funding stream. If a large donor stops giving, or if a couple contracts or grants are not renewed, that could put you in a pinch. Have a plan for replacing lost revenue in a situation like this.
On the expense side, pay attention to how much you spend on overhead (fundraising, and management and general expenses). Devoting too much of your budget here will limit what you invest in your programs, and can hinder your work. Balance this against the need to pay reasonable salaries to retain staff, rent or own office space with enough size and resources to meet your needs, etc.
Compare revenue and expenses to prior periods, e.g. a year and two years prior. Is your organization growing? Are certain revenue streams, such as grants, donations, or government contracts, easier or harder to come by, or will they be in the future? If you’ve launched a new program, is it performing as well as you planned? Similarly, how are you doing compared to your budget? Dig into significant variations and what caused them.
Consider how your organization is handling cash reserves. If you have a thin margin, are you using your cash flow to give yourself a bigger cushion? If you’re drawing on your reserves, was this planned, such as a new or expanded program, or a capital project? If you’re operating at a loss, why is that? Evaluate if you’re overspending somewhere, if you should change your pricing model, do more fundraising or advertising for your services, etc. For programs not performing well financially, review whether they are sustainable in the long-term, if you need to restructure them, or wind them down.
You may also find it valuable to compare yourself to similar organizations. Look at those who are doing similar work in your area and are a similar size. You can find financial statements from other nonprofits at GuideStar, the Foundation Center’s 990 Finder, or request them from the organization directly.