Key metrics and indicators that are obtained from real-time data can assist key stakeholders in carrying out financial analysis while monitoring the financial health of their nonprofit organizations. Likewise, it also allows nonprofits to effectively present stewardship measures to donors. Now more than ever, donors today want greater financial transparency and responsibility from nonprofits.
- Financial analysis provides a great way to measure the efficiency of the various nonprofit activities
- It is best to always keep an operating reserve of at least three months’ worth of annual expenses on hand.
What are the top financial analysis metrics for nonprofits?
Nonprofits must be willing to identify measures to regularly assess their financial health. In this article, we will consider some of the critical metrics for nonprofit financial analysis.
1. Cash Flow from Operations
This financial ratio allows you to compare your organization’s expendable net assets to total expenses to provide answers in critical areas. Just like any other financial data, there is a need to examine the metrics to identify trends or outliers.
Based on the Statement of Cash Flows, the amount of cash flows oftentimes shows a more accurate indication of a nonprofit’s activities than net income. Also, this financial analysis takes into account restricted gifts or contributions, depreciation expense, and investment income. By and large, a positive cash flow from operations indicates that an organization’s costs of unrestricted operations and programming are effectively covered.
It is best to always keep an operating reserve of at least three months’ worth of annual expenses on hand. Essentially, this helps to fund programs in the case of unforeseen circumstances.
2. Liquidity Financial Analysis
The right amount of liquidity for an organization is determined by various factors. This includes fund volatility, the economic environment, and cash management methods, among others.
Liquidity is calculated by dividing cash on hand by average monthly expenses. Also, liquidity tends to directly impact how an organization responds to new possibilities and adjusts to unforeseen budget constraints. For the most part, nonprofits should have three to six months of unrestricted capital on hand as a general guideline.
3. Profit margin ratio
In simple terms, a profit margin ratio reflects whether the nonprofit earns or receives more money than it spends on operations. Likewise, making a “profit” in the nonprofit environment is essentially the process of generating net assets without donor constraints. It can also be defined as increasing unrestrained net assets. By and large, a profit margin ratio is used to measure net asset performance.
The target profit margin is determined by the type, size, and goals of the organization. Likewise, this margin is typically set during the budgeting process. In general, a positive profit margin suggests that the organization is performing well, creating revenues and cash flow, or utilizing its resources appropriately.
4. Financial Analysis on Number of Donations
Nonprofits can use this statistic to assess public interest in their cause. Also, the number of donations statistics provides a great way to obtain insight into donor demographics and the problems they care about. The average amount of gifts is considered a financial KPI (Key Performance Indicator) that is closely tied to the number of donations. Overall, the average gift when computed, not only sheds insight into donor lifestyle but also provides significant information about a campaign’s effectiveness.
5. Fundraising Return on Investment (ROI)
Nonprofits can use this statistic to assess the success of each campaign. Essentially, it comprises two parts namely Annual investments and Annual funds raised.
Annual investments identify the focus of the organization’s current efforts. Hence, the costs of running such programs or marketing initiatives are referred to as investments.
Annual funds raised display the financial outcomes of the organization’s efforts. Donations are another term for funds raised.
The majority of nonprofit revenue comes from donations. As a result, collecting and evaluating this KPI will assist the organization in determining its most fruitful campaign. Also, this information allows a nonprofit to maximize its efforts and model future initiatives after its most successful program.
Conclusion
To sum it all up, nonprofit finance executives are responsible for ensuring appropriate stewardship of donor contributions. This helps to ensure that the largest percentage of resources can go toward mission achievement rather than operating expenses. Likewise, financial analysis provides a great way to measure the efficiency of various nonprofit activities.
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