2. WEEK 05 - TOPICS
• Analyzing the Financial Health of Nonprofit
Organizations
• Trend Analysis
• Analysis of the Statement of Activities
• Analysis of the Statement of Financial
Position
• Liquidity Ratios and Other Ratios
• Budget Consideration
ACCT101-Week05 2
3. Analyzing the Financial Health of
Not-for Profit Organizations
Objective: To read the financial statements with
enough knowledge to allow the reader to ask
some good questions and really understand the
financial operations and financial position of the
organization.
Users: donors, grantors and other contractors,
lenders, vendors and other service providers,
employees, government regulators,
management, board of directors
ACCT101-Week05 3
4. Analyzing the Financial Health
of Not-for Profit Organizations
“ I am reading the financial statements of a
not-for-profit organization as a user of the
financial information. What am I supposed to
be looking for?
ACCT101-Week05 4
5. Financial Statement Analysis
Tool Kit
• Independent Auditor’s Report
• Comparative Financial Statements
• Functional Expense Ratios and Other
Analyses
• Reading a Not-for-Profit Organization’s
Bottom Line
• Reliance on a Limited Number of Revenue
Sources
• Renewable Revenue Sources
• Liquidity and Other Financial Indicators
• Budget Considerations
ACCT101-Week05 5
6. Financial Statements
Main Financial Statements required by U.S. GAAP
(GAAP = Generally Accepted Accounting Principles )
GAAP also requires the presence of Notes to the Financial Statements
Nonprofit Organizations For-Profit Corporations
Statement of Activities or Statement
of Functional Expenses
Income Statement or Statement of
Operations
Statement of Financial Position Balance Sheet
Statement of Cash Flows Statement of Cash Flows
ACCT101-Week05 6
7. Independent Auditor’s Report
Look for standard three paragraph report
Are Financial statements prepared in
accordance with GAAP?
Is the Audit performed in accordance with
GAAS( generally accepted auditing
standards)?
- Are there any qualifications?
- Are there any Departures from GAAP?
- Any Restrictions on the scope of the audit?
ACCT101-Week05 7
8. Comparative Financial Statements
(Trend Analysis)
Vertical Analysis:
Comparison of a statement items (or line) to the Total
Horizontal Analysis
• Very basic method: compare the current year amounts with prior
year amounts( Note: GAAP does not require comparative financial
statements be presented , but does encourage it)
• Possible approaches
1.Look for significant differences in amounts from one year to
the next and try to find out the reasons for those differences
2. Calculating differences as a % of prior year amounts might
shed some light on the analysis
3. Look for line items which did not exist in the prior year, but
do exist in the current year. Also, look for prior year amounts that do
not exist in current year
ACCT101-Week05 8
9. Comparative Financial Statements
(Horizontal Analysis)
Horizontal Analysis
Compute the trend for the following (% Change from prior to current
year) and give and interpretation of the change.
- Total Cash and cash Equivalent
- Contribution (Pledge) Receivable
- Current Assets
- Fixed Assets
- Total Assets
- Current Liabilities
- Total Unrestricted Net Assets
- Total Temporarily Restricted Assets
- Total Permanently Restricted Assets
- Total Net Assets ACCT101-Week05 9
10. Functional Expense Ratios and
Other Analyses
Functional Expense Classification: Charitable
organizations are required to report expenses in
their functional classifications:
- Program expenses
- Management and general expenses
- Fundraising expenses
Approach: In calculating the following ratios,
compare with prior year and to other not-for-
organizations in similar fields
ACCT101-Week05 10
11. Functional Expense Ratios and Other
Analyses
• Ratio of Program expenses to total expenses ( one of the most
important performance indicators)
Formula: Program expenses / Total expenses
Meaning: this provides an indication of how much of an organization’s
total operations are spent on the programs for which it exist.
• Ratio of management and general expenses to total expenses
Formula: Total management and general expenses / Total expenses
Meaning: Indicates how much of every dollar is spent on
administrative activities
• Ratio of contribution revenues to fundraising expenses
Formula: The contribution revenue / Fundraising expenses
Meaning: Measures how much money is raised for each dollar spent
on fundraising. The higher the ratio, the better.
ACCT101-Week05 11
12. Reliance on a Limited Number of
Revenue Sources
• Approach
Look at the various revenue sources to get a sense of
whether the organization is highly dependent on one or
two sources of revenue that might present a risk if its
operations should the revenue source cease to exist
• Sources to Consider
- Contributions from donors
- Fee-for-service activities
- Grants or contracts from governmental agencies
and others
• Importance of Renewable Revenue Sources
ACCT101-Week05 12
13. Liquidity and Other Financial Indicators
(From the Statement of Financial Position)
• Working Capital
Formula: Current Assets – Current Liabilities
Meaning: Measures what is left over in short-term financial resources
if all of the short-term financial obligations are paid.
• Current Ratio
Formula: Current Assets / Current Liabilities
Meaning: Measures how many times over the organization can pay
its current liabilities with its current
• Debt Ratio
Formula: Amount of Debt outstanding / Total assets
(Note: Total debt includes current portion of long term debt and
long term debt)
Meaning: Measures how much of the organization’s assets are
financed by the issuance of debt
ACCT101-Week05 13
14. Liquidity and Other Financial Indicators
(From the Statement of Financial Position)
• Receivable Turn Over
Formula: (Fees of Service revenue + Contribution Revenue ) / Total
Average Account Receivable (from Fees for service and contributions)
Meaning: Measures the amount of time that it takes to turn receivable
into cash.
• Average Age of the Receivable
Formula: 365 Days / Receivable Turn Over
Meaning: Measures how many days of revenue is still uncollected or
has not been collected yet .
• Inventory Turn Over
Formula: Cost of Good Sold / Average Inventory Balance
Meaning: Measures how many times inventory has been turned to
produce sales.
ACCT101-Week05 14
15. Budget Consideration in Financial Analysis
Budget
• Definition: Blueprint of how the organization expects to
use its limited resources to further its programmatic
mission
• Budgeting is a tool that forces coordination of the
organization’s activities and helps identify coordination
problems.
• Budgets are prepared for specific time periods.
• Variance Analysis: Differences between actual results
and the budget plan are called variances.
• Budgets and Financial may be prepared on different
basis and result in some disconnects
ACCT101-Week05 15
16. Budget Consideration in Financial Analysis
Methods of Budgetary Control
• Break the annual budget down into quarterly periods
and, if not overly burdensome, monthly periods.
• Both revenues and expenses should be budgeted
• Avoid overly optimistic revenue and expense projections
Budget as an Evaluation Tool
• Periodically, compare actual to budgeted amounts and
act upon differences where warranted
• Have in place a reasonable process to allow for budget
modifications
ACCT101-Week05 16
17. Budget Consideration in Financial Analysis
Example of Budgetary Variance Analysis
ACCT101-Week05 17
