The diverse aspects of nonprofit economics are critical for directing, managing, and gauging an organisation’s performance and viability. Financial analysis is a great way to establish sound decision-making in nonprofits. Even more, organisations can leverage the strategy to identify trends and evaluate their financial health.
- The vertical analysis method can enable board members to effectively compare financial performance across nonprofits.
- Ratio analysis helps to evaluate a nonprofit’s performance to industry standards or historical data.
What are the types of financial analysis?
Financial analysis is an effective approach that can be leveraged by a nonprofit to methodically review its financial statements, ratios, and other pertinent data. Essentially, the goal is to analyse financial performance. In the same way, organisations can identify strengths and weaknesses and make informed decisions in the area of operations, investments, and financing activities.
Here are the various types of financial analysis.
1. Horizontal Analysis
Horizontal analysis, also known as trend analysis, is the process of comparing financial data across various reporting periods. The aim is to discover trends, patterns, and growth rates. By and large, this type of analysis provides a good understanding of a nonprofit’s past performance and can also help forecast future developments.
2. Vertical Analysis
Vertical analysis or common-size analysis, is the process of comparing each line item in a financial statement to a base figure. This could be total revenue or total assets. Essentially, it helps evaluate the relative importance of each item.
By and large, the vertical analysis method can enable board members to effectively compare financial performance across nonprofits or organisations of varying sizes.
3. Ratio Analysis
Ratio analysis helps to determine financial ratios from financial statements. This type of analysis can be used to examine an organisation’s efficiency. Likewise, a ratio analysis helps to evaluate a nonprofit’s performance to industry standards or historical data.
4. Cash Flow Analysis
Cash flow analysis investigates an organisation’s cash inflows and outflows. By and large, it reveals information about a nonprofit’s general financial health. An organisation can use this type of analysis to assess its ability to satisfy short-term obligations while also investing in growth opportunities.
5. Trend Analysis
Trend analysis is the process of studying historical data and patterns to discover and analyse trends in financial performance as well as other critical indicators. Likewise, a financial analyst can obtain insights into an organisation’s financial health, estimate future performance, and make sound investment or organisational decisions just by studying trends.
6. Benchmarking
Lastly, Benchmarking is the process of comparing a nonprofit’s financial performance, ratios, and practices to industry norms. Essentially, this study can help identify areas for improvement and also assist in setting achievable performance goals.
Conclusion
To sum up, financial analysis assists with critical decision-making as it provides a great way to identify patterns and evaluate an organisation’s financial health. In addition, it allows nonprofits to improve operational efficiency, optimise resource allocation, and increase overall profitability. Nonprofits can leverage financial tools to help with the effective evaluation of financial performance.
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