Author: Jayson Cardwell | Posted: 30-09-2007 | Views: 7 |

A good strong financial position is the backbone of any well-run organization. Without a consistent flow of cash and income in and out of the company it would difficult for it to continue operating in one form or another. If cash and revenues become light, then the organization will starve. Should the cash flow be heavy, yet no spending take place the financial position becomes obese and the company will lag its competitors.

The same runs true for not-for-profits organizations (NFPs). If you run too lean throughout the year during the winter season (when donations are few and far between) you may not have the resources to survive a continued winter season. Should you fatten up on profits and hold on too long, you stymie growth, and fail to meet core objectives.

This could in turn lead to fewer donations as investors in your vision will see you as inefficient with their dollars. So what constitutes a good, solid, strong financial position? It actually goes beyond mere cash flow; it stretches into the Profit & Loss statement, into the Balance Sheet, and into the policies and internal controls of a company. Let’s look first at the P&L statement.

The two main categories that an NFP should look for first are gross revenues (donations, grants, sales, investment returns, etc) and operating expenses (what makes the company go, general/admin in some circles). You’ll most likely notice annual growth in the operating expenses, this is normal and to be expected. Inflation, employee additions, salary increases will add to the expenses causing annual increase. What needs to be monitored though is how much growth. If you’re giving your employees annual raises of 5%, and inflation is 4%, yet you see an increase from year-to-year of 15%, it may be time to hunt down the cause. Did that increase line up with the strategic plan? How does the budget look? In the same manner observe the increase in program expenses and track why there is an increase. Most importantly breakdown the annual changes in revenues. Grant revenue may fluctuate the most based upon whether or not grants are awarded. Donation revenue, and other revenues increase should outpace expenses by no less then 5%. Remember that income is a present time projection of future cash flow.

Secondly let’s examine the Balance Sheet. There are several main areas in current assets that we need to discuss. Cash obviously is a good indicator of financial strength. Being flush with cash reveals instant liquidity, and the ability to most present obligations.

Receivables need to be monitored closely. A decrease in receivables reveals one of two things. The first being your donors are contributing and this should manifest itself in lowered liabilities, more cash, and possibly higher program expenses. The second could be an indicator of future troubles. Lowered receivables also could show less planned giving. Unless your revenues are soaring (indicating you’re receiving cash instead of ‘credit’ donations) your organization could experience a cash crunch. Finally you need to compare your current liabilities with current assets; this will indicated whether or not you have the solvency to meet your current obligations. Keep a close eye as well on depreciation; this will indicate whether or not future capital purchases will need to be budgeted for. Liabilities are also a key component of the Balance Sheet. What we want to look for here is a rise in debt, and why that would have occurred. Are you dipping into your credit line for day-today expenses or payroll? Did you take on a large loan to launch a new program, buy a building? Liabilities need to be tied to income producing assets to remain in a strong financial position.

Lastly we want to touch on internal controls and policies. These do actually reach the financial statements. Usually when they hit the financial statements they’d hit under a section no one would want to advertise… fraud. Proper internal controls and policies governing cash management check signing, purchases, and use of corporate credit cards can help to maintain a strong financial position and a public relations position as being an accountable, responsible organization. Internal controls are not put in place to hinder, but to help. They don’t single out employees or are created to make those already in position feel as if they are criminals, they are placed to help deter crime and keep the entire organization out of trouble.

So where are you on the scale of financial strengths, let’s classify some firms and see what characteristics they have:

Gorillas – Strongest of all firms, proud to show off their strength and display their discipline. These organizations have everything manages well, no one area in a predator and threat to their well being. They are strapped with cash, but still have enough to funnel into projects, and keep a healthy investment position. They use debt well, borrowing money wisely and using it to create more.

Ox – Equally as strong as a gorilla, but something is holding them back from really taking off. It could be their operations, their donor development, possibly they’ve taken on too much debt and can’t shed it. They’re not in any danger, however while they struggle and fight that yolk it makes it more difficult to reach their goals.

Wolves – They are strong, but only when things are going their way in numbers. They rely upon a few donors to help them make it, but if left alone they lack the skill necessary to survive a long winter. They need strength in numbers and for it to be consistently there. They lack building a reserve to help whether the lonely times.

Mosquito – The weakest of all NFPs. They must feed off one or two healthy donors. Their life expectancy is rather short fur to their methods of operations. When they try to fatten themselves off one or two donors they run the risk of exploding. They are constantly using up their storage to survive, and they need constant injections of capital to stay going.