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

1. Nonprofit Financial Health:
New Tools for Analysis
3 May 2012
1
© 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.

2. Today’s Facilitators
Rebecca Thomas
Vice President and Product Manager, NFF
Scott Menzel
Product and Customer Experience Manager, GuideStar
Pamela Jowdy
Senior Product Manager, GuideStar
2

3. Participant Poll
#financialscan 3

4. Today’s Objectives
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
#financialscan 4

5. The Challenge:
Uncovering a nonprofit’s comprehensive financial
story
#financialscan 5

6. 6

7. #financialscan 7

8. #financialscan 8

9. #financialscan 9

10. #financialscan 10

11. Nonprofit Financial Analysis 101:
Considerations and Best Practices
#financialscan 11

12. #financialscan 12

13. Five Steps to Assessing a Nonprofit’s
Financial Health
1. Profitability
2. Revenue Dynamics
3. Expense Dynamics
4. Composition of Balance Sheet
5. Liquidity
nonprofitfinancefund.org ©2012 Nonprofit Finance Fund® 13

14. Understanding Operating Performance:
Statement of Activities/Income Statement
Revenue  Where does the organization’s money come from?
Dynamics  Is it reasonably diversified? Is it at risk?
 Do revenue streams appear reliable / consistent?
 How have expenses fluctuated over time?
Expense
 Are expenses adjusted in line with changes in
Dynamics
revenue?
 Does the organization regularly cover its full costs
Profitability with unrestricted revenue?
 Is the agency saving? If so, is it enough
nonprofitfinancefund.org ©2012 Nonprofit Finance Fund® 14

15. Where Do I Find the Bottom Line?
(Audits & Internals)
ABC Center Statement of Activities
Years ended June 30, 2008 ($ in thousands)
Operating Activity
Unrestricted Temp. Perm. Total
Restricted Restricted
Revenues, Gains and Other Support
Support
Foundations 113 58 – 171
Government 57 – – 57
Corporations 49 – – 49
Individuals 248 – – 248
Total Support 467 58 – 525
Investment Income 7 – – 7
Tickets, Dues, Other 484 – – 484
Net Assets Released from Restriction 749 -749 – –
Total Revenue, Gains and Other Support 1,707 -691 – 1,016
Operating Expenses
Program Services 1,004 – – 1,004
Supporting Services
Administrative 209 – – 209
Development 49 – – 49
Total Supporting Services 258 – – 258
Total Expenses 1,262 – – 1,262
Change in Net Assets 445 -691 – -246
nonprofitfinancefund.org ©2012 Nonprofit Finance Fund® 15

16. 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)
nonprofitfinancefund.org ©2012 Nonprofit Finance Fund® 16

17. Where Do I Find the Bottom Line? (Form
990: On the Balance Sheet!)
Balance Sheet from Sample Form 990
B.O.Y.
B.O.Y. E.O.Y.
Unrestricted net assets (end of year) $3,527,235
-
Unrestricted net assets (beginning of year) $3,770,516
Change in unrestricted net assets ($243,281)
nonprofitfinancefund.org ©2012 Nonprofit Finance Fund® 17

18. Beware! Unusual Large Surpluses
May Reflect Capital
Unrestricted Revenue & Expenses
(including non-operating) Operating Revenue & Expenses
($ in thousands) ($ in thousands)
1,800 1,800
1,600 1,600
1,400 1,400
1,200 1,200
1,000 1,000
800 800
600
600
400
400
200
200
0
0
2008 2009 2010 2011 2012 2013
2008 2009 2010 2011 2012 2013
Revenue, including non-operating Expenses (before depreciation)
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.
nonprofitfinancefund.org ©2012 Nonprofit Finance Fund® 18

19. Surplus Size Matters:
Breaking Even is Never Enough
Like any organization, nonprofits need to cover
the ‘full cost’ of delivering programs
 Tax Status is NOT a Business Model
 Full costs > Operating Expenses
Full costs include: 10 10
Operating Fixed Asset
Expenses Additions
Debt Principal
0 Depreciation 1
Working Capital Reserves
10 10
nonprofitfinancefund.org ©2012 Nonprofit Finance Fund® 19

20. METRIC - Operating Results:
A Guideline
Requires
Financial Moderately
Healthy Immediate
Indicator Healthy
Attention
Surpluses
consistently cover Breakeven Consistent
Unrestricted results or
Surplus/Deficit full costs, and/or
contributing to periodic growing
(as % of healthy balance surpluses deficits
expenses) sheet and savings insufficient to
cover full costs (-3%+)
(3%+)
(-3% to +3%)
nonprofitfinancefund.org ©2012 Nonprofit Finance Fund® 20

21. Understanding Balance Sheet
Health: Statement of Position
Assets  Cash – How much? How “liquid?”
 Receivables – Are they slow to collect? Balance
 Fixed Assets – Are fixed assets being maintained?
Sheet
Liabiliti
Liabilities  Line of Credit – Is cash flow being managed Asse es
through a line of credit? Appropriately? ts Net
 Debt – Is there a plan for repayment? Assets
Net Assets  Unrestricted Net Assets – Does the nonprofit
& Reserves 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?
nonprofitfinancefund.org ©2012 Nonprofit Finance Fund® 21

22. Measuring Liquidity (Take-Home)
Total Cash
Months of Cash =
(Total Expenses / 12)
Months of
Unrestricted Liquid Unrestricted Net Assets –
Net Assets = (PPE – PPE Debt)
portion of net assets (Total Expenses / 12)
available for operations
Working Capital = Current Assets – Current Liabilities
nonprofitfinancefund.org ©2012 Nonprofit Finance Fund® 22

23. METRICS - Liquidity:
A Guideline
Requires
Financial Moderately
Healthy Immediate
Indicator Healthy
Attention
3+ months cash and
working capital Sufficient to
Months of cover cyclicality Less than one
One ore more board of cash flow month and
Liquidity
designated reserves (aim for 3 declining
for risk or months)
opportunity
Risk – Cash = Crisis
nonprofitfinancefund.org ©2012 Nonprofit Finance Fund® 23

24. 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 risk
and pursue new opportunities
nonprofitfinancefund.org ©2012 Nonprofit Finance Fund® 24

25. Is there a “right” answer?
#financialscan 25

26. Financial SCAN : SM
Anatomy of a solution
26
#financialscan

27.  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 27 board members
and

28.  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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29.  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.
29

30. #financialscan 30

31. 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
31

32. Financial SCAN Demonstration
Online Report Generation
#financialscan 32

33. 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
33

34. Common Questions
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?
34
#financialscan

35. Product Information and Questions
www.guidestar.org/financialscan
webinars@guidestar.org
“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 Grantmaking
David & Lucile Packard Foundation
Financial SCAN Funder
#financialscan 35

36. The Backup
Appendix
36

37. GuideStar USA
www.guidestar.org
 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
37

38. Financial
Health
Dashboard
38 #financialscan

39. Graphs, Narrative and Questions to Consider
39

40. Peer Comparables Dashboard
40

41. 41

42. 42

43. 43

44. 44

45. 45

46. 46

47. 47

48. Nonprofit Financial Health:
New Tools for Analysis
3 May 2012
48
© 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.