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Rebecca Thomas: Faster, Smarter Nonprofit Financial Analysis, Part I

02 Oct, 2012

It’s worth taking the time to learn to “speak” with numbers, writes  Rebecca Thomas, noted financial planning and management consultant expert for nonprofits and foundations. Part I of II.

Understanding and unearthing  insights about a nonprofit organization’s financial dynamics, strengths and weaknesses can be skills-intensive and time-consuming.  But, avoiding it means that the lack of a dependable, objective method to analyze and compare nonprofit finances just becomes even more challenging.

Nonprofit Finance Fund (NFF) has long held that nonprofits are more than just the sum of their programs, and more than their overhead ratios.  However, existing nonprofit ratings platforms simply are not adequate for the complex task of analyzing and interpreting nonprofit financial data appropriately and  comprehensively. Numbers can tell a story as persuasively as words, one that can motivate staff, board members and funders. The current tools, however, make it difficult to provide a holistic picture of an organization’s business model and balance sheet.

The result is that investors and donors are prone to make premature or misinformed fund-no fund decisions versus engaging grantees in dialogue about what they really need to survive and thrive.

In an effort to “meet the numbers” their supporters care about, nonprofits end up managing to meaningless ratios, rather than to enterprise health.Financial reporting and communications then becoes an exercise in compliance, rather than another way to support the mission and advance organizational effectiveness.

What the field has long needed is a data platform and analytical framework that opens up financial data and debunks myths about what it takes to be a financially viable and vibrant institution.

Picture a world in which public and private funders, nonprofits and trustees alike  rallied around a better set of clearly defined metrics and a more informed philosophy for interpreting them. Imagine the possibilities of a social sector where:

  • Financial literacy and clarity played a natural and higher role in nonprofit planning, management and governance
  • Increased transparency and comparability of financial information encouraged greater collaboration between grantmakers and grantees
  • Uniform data standards led to better investment decisions, with money flowing to organizations that most effectively link money to mission.

The idea isn’t new but it is still an elusive space for too many nonprofits and for the wider social sector: to hinge our work on information that can be used to take direct action, where capital and revenue are invested in organizations that are regularly demonstrating that they can do long-term good and measure it.

Our own part to move the sector forward is the  NFF and GuideStar launch in April 2012 of  Financial SCAN (Situation & Comparables Analysis). It’s the first web-based data platform to offer a standardized, comprehensive picture of nonprofit financial health.

Financial SCAN offers financial knowledge and insights to support improved communication and decision-making between nonprofit organizations and their supporters and advisors. The product automates financial analysis for 280,000 nonprofits (all filers of the IRS Form 990) and was designed to change our understanding of the financial requirements of building and sustaining healthy, effective organizations.

 In Part II, Rebecca shows one place to start doing this work: learning to use financial statements as daily tools in nonprofit practice.

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