The following is a cross-post from NFF’s Social Currency blog, written by Rebecca Thomas, vice president of Strategy & Innovation. You can find the original post here.
Nonprofit Finance Fund (NFF) has long held that nonprofit organizations are more than just the sum of their programs, and more than their overhead ratios. Existing nonprofit ratings platforms are simply inadequate to the complex task of analyzing and deriving insights from nonprofit financial data. They do not help nonprofit organizations communicate their financial story and goals to staff, board members and funders. They fail to provide a holistic picture of an organization’s business model and balance sheet.
Currently available tools can lead to premature or misinformed fund-no fund decisions, rather than a more enlightened grantmaker-grantee dialogue about what organizations need to survive and thrive. They risk turning nonprofit financial analysis into an exercise in compliance rather than a tool to advance organizational effectiveness.
If we’re honest with ourselves and really care about long-term effectiveness, we need to conduct the kind of comprehensive financial analysis that looks at the entire nonprofit enterprise. We need a more nuanced understanding not only of costs but also of revenue reliability, profitability, balance sheet health and liquidity. We need to look beyond numbers and ask probing questions about what kinds and amounts of resources are required in the context of an organization’s strategy, marketplace and lifecycle. These questions might include:
- Which key revenue streams are relatively reliable and which are at risk?
- Is the organization covering its full costs and generating regular surpluses?
- If not, are expenses adjusted in line with changes in revenue?
- Does the organization have adequate access to cash to manage its cash flow cycles?
- Are facilities and other fixed assets maintained as they depreciate?
- Is the organization’s board prioritizing saving for the long term and setting aside surplus cash into reserve?
Answering these questions takes time and requires sophisticated analysis skills. Fortunately, help is at hand. NFF has been working with GuideStar for more than a year to create a new data platform for nonprofit financial analysis and education. Financial SCAN (Situation & Comparables ANalysis) provides instant financial information on 280,000 nonprofits across the country.
Derived from Form 990 data filed with the IRS, Financial SCAN shows up to five years of financials for a nonprofit. Dashboards and graphs reveal ratios that are much more relevant to organizational health and stability, such as: profitability margins, estimated full costs, depreciation of fixed assets and months of liquidity. The platform allows you to compare the financials of multiple peer organizations to better understand trends across a sector. We’ve also incorporated an educational guide to help users make sense of the data and understand its implications.
By bringing transparency and comparability to financial information in the sector, Financial SCAN can provoke more informed, less judgmental and increasingly honest dialogue among nonprofits, their funders and advisors about what organizations really need to be stable and effective. We encourage you to learn more about Financial SCAN and how it can be helpful to you.
Rebecca Thomas has overall strategic responsibility for national initiatives, funder partnerships and new online and next-generation services that advance NFF’s profitability, visibility and impact. Ms. Thomas has extensive experience advising nonprofits in areas of financial planning and management and consulting for foundations seeking to incorporate finance into grantmaking practice. Ms. Thomas received an MBA from Columbia University’s Graduate School of Business and graduated from Yale University with a BA in French and International Studies.