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Building Financial Sustainability in Your Organisation

This workbook started from work undertaken by Foresters Community Finance in 2009-2011. The content is based on experience, research and learning from what works in helping non-profits to diversify their income base. The original material was based on Foresters work in its education program. The material has since been developed and updated in accordance with Knodeʼs experience in working with non-profit organisations and social enterprises to develop their strategic and business models. Nina Yousefpour from Foresters Community Finance has also since provided updated case studies for the workshop. The material is licensed through creative commons - you can use it freely as long as you attribute the source!

This workshop is designed to assist participants to apply tools and principles of sustainability to their organisations financial planning process. Using case studies (from both Australia and overseas) and real life financial records, the workshop will be practical and will centre on how financial management can be geared towards growing an organisations stability, assisting in developing some independence from total reliance on funding sources and building future financial resilience. On completion of this workshop participants will be able to:

• Appraise their organisations financial health and sustainability;• Evaluate their current financial practices in relation to building organisational

sustainability;• Identify key practices and strategies for managing their organisationʼs finances to

maximise sustainability;• Evaluate the risk / return potential of these key practices and strategies;• Apply key financial sustainability practices to their organisations finances;• Use the practice principles to examine the feasibility of community asset building;• Reflectively analyse these practices in the light of a range of income generating

activities.

What is ‘financial sustainability’ in the context of community organisations and non-profits?

Financial sustainability can be defined as:The ability of the organisation to mobilize, manage and efficiently use all its resources (financial, human and mission resources) on a reliable basis to achieve its core objectives.

The meaning of financial sustainability in the context of non-profit organisations usually does not mean financial self-sufficiency but may mean that an effective combination of grant monies and earned income in conjunction with effective utilisation of human and mission resources.

Increasingly it is also recognised that the context of community organisations ‘financial sustainability’ cannot be separated from impacts and outcomes:

“Sustainability encompasses both financial sustainability (the ability to generate # resources to meet the needs of the present without jeopardizing the future) and # programmatic sustainability (the ability to develop, mature, and cycle out programs # to be responsive to constituencies over time).” # # # Bell et al (2010) Nonprofit Sustainability: Making Strategic Decisions # # # for Financial Viability

Improving your financial sustainability is not necessarily about becoming more ‘business-like’ – it is about becoming better at what we do, it is about becoming more effective in our mission to reach our social objectives.

“We must reject the idea – well intentioned, but dead wrong – that the primary path to greatness in the social sectors is to become ‘more like a business’. Most businesses – like most of anything else in life – fall somewhere between mediocre and good. Few are great. When you compare great companies with good ones, many widely practiced business norms turn out to correlate with mediocrity, not greatness. So, then, why would we want to import the practices of mediocrity into the social sectors?...The critical distinction is not between business and social, but between great and good. We need to reject the naïve imposition of the ‘language of business’ on the social sectors, and instead jointly embrace a language of greatness” Jim Collins, Good to Great and the Social Sectors, 2006; p1

Unlike business, non-profit organisations do not grow their financial sustainability as a means to increase profits or benefit shareholders. Their sustainability, as we have seen, is very much linked to increasing their impact.

There are a number of features of financial sustainability in non-profit organisations:

Clear and shared visions of the intent or purpose of the organisation; Establishment of health reserves that are owned by the organisation; Growth of independent, unrestricted incomes; Strong links between financial objectives and social objectives (eg. Mission-based

investment); Movement from responsive use of financial information to strategic use of financial

information in planning the organisations future; Ownership of assets; Leveraging from assets to increase impact, benefit constituents, and build the wealth

of community.

3Building Financial Sustainability in Your Organisation

Financial sustainability in community organisations does not and should not happen overnight, and in reality, it is a never-ending story. Building financial sustainability is a developmental process that needs to involve all of those who work with and support the organisation.

Although the heart of most community organisations is centred on the impact they seek to generate, as expressed in their mission, the reality is that finance and financial management underpins their capacity to achieve that mission. Without some kind of sustainable financial structure community organisations will not be able to put their mission into practice. Further, if a community organisation is constantly ‘hungry’ and is in a starvation cycle in terms of funds, often energy can be distracted away from mission and into ‘feeding’ the organisation. Putting strategic focus on what it is that your organisation needs to do to become viable and sustainable ultimately means that you are creating a solid foundation from which to focus on your mission and achieving the social impacts that you exist to reach.

Understanding your organisations sustainability potential is about more than reading financial statements. It involves all of the following:

The Pathway toward Financial Sustainability:

“Sustainability is an orientation not a destination” (Jeanne Bell et al, 2010)

Note: some of this material is adapted from nonprofitfinancefund.org, 2012

Understanding your organisations

operating performance (revenue base, expenses and

outcomes)

Understanding the strength of your organisations balance sheet

(assets, liabilities, net worth)

Making an assessment of your organisations

capability to handle risk and pursue

opportunities.

Comprehensive assessment of an

organisations financial reality / future options

STORY + MISSION

LEADERS + NETWORKS RESOURCES

+ ASSETS

CONTEXT4

Most non-profit community organisations are primarily interested in increasing their income – the logic is that more income equals more programs equals greater impact for the people or groups that the organisation serves. Therefore, most managers and board members of community organisations focus their attention on increasing their incomes (usually through grants) and their financial statement of choice is the ‘profit and loss’ or income and expenditure statement.

Certainly it is important for community organisations to develop adequate income streams to ensure that they can resource the meeting of their social and community objectives. Building financial sustainability though, is about more than this. It is about ensuring that there is sufficient diversity in the income that is attracted into the organisation (especially unrestricted income), and it is about building the ‘wealth’ of the organisation. ‘Wealth’ is often a misunderstood concept in Australian society. It refers merely to assets (financial and non-financial) that the organisation owns and which can be transferred either to others or to build the long-term well-being of the organisation.

An organisation’s wealth is reflected in their Balance Sheets – and an organisation’s net wealth can be calculated by deducting what an organisation owes from what it owns. In other words, net wealth is an organisation’s assets minus their debts or liabilities. Organisational assets can be financial (eg. Savings), or non-financial, (eg. Property) or non-tangible (eg. Knowledge, networks, skills).

It is now well recognised that assets and wealth are just as important to understand as income in addressing intergenerational poverty amongst individuals and households. What we have noticed over the past fifteen years is that this can also be applied to organisations. Those non-profit organisations who have grown and developed over the past fifty years in Australia have been those who have not only increased their income but have built their wealth over that time.

Wealth and Income: A key difference for Building Financial Sustainability

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What is your organisations annual income? __________________

In the past two years has your income:#☐ Grown# ☐ Shrunk# ☐Stayed the same

What are the key sources of your income?

In the past two years have the key sources of your income: ☐ Diversified# ☐ Narrowed## ☐ Stayed much the same

What is your organisations net wealth or net worth?_________________

Over the past two years has your net worth:☐ Grown# ☐ Shrunk# ☐Stayed the same

What is your overall assessment of your organisations financial sustainability?


! !!!!!Survival Stability Security Sustainability

Survival Stability Security Sustainability

Description of the organisation’s financial situation

Funding through grants just covers costs, with some areas operating in deficit for short periods until further grant monies are found.

A level of recurrent funding that sustains the basic operations and infrastructure of the organisation is achieved. Small amounts of earned income smoothes some of the rough periods.

The importance of diversified income is recognized and moves are made to increase and secure greater levels of diversified income. The organisation focusses on consolidating and taking a strategic approach to integrating impact and financial health.

Diversified and consistent revenue, assets and investments increase the wealth and independence of the organisation and allow expansion of programs, and increased innovation. Assets leverage greater levels of earned income.

Focus of organisational energy

Much energy is focused on fundraising

Much energy is focused on innovative ways to serve constituents and community.

Focus of financial plans

Financial plans focus on the short term – how to get through this next year. Short term financial gains may shift the core objectives.

Financial plans focus on the short, medium and long term meeting of the organisation’s objectives.

Financial and social culture of the organisation

Dependent, reactive Proactive, visionary

Income Mix Funding income dominates – in fact, the organisation is totally dependent on funding income.

Funding income dominates with earned income increasing.

Funding income is complemented with solid parts of diversified income.

Income is diversified, and includes earned income and asset leveraged income.

Where are we?

Where would you place your organisation on this continuum - and why? Have you shifted position over the last two years? Why?


Sustainability cannot be just financial

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Jim Collin’s Hedgehog concept comes from Isaiah Berlin’s story of the ‘Hedgehog and the Fox’. In this story, the fox is always thinking up new and cunning ways to outwit his potential prey, the hedgehog. The hedgehog, on the other hand, successfully avoids becoming the fox’s dinner by doing one thing again and again. Each time the fox attacks, the hedgehog rolls himself up into a ball, exposing all his sharp spikes and this outfoxes the fox. The hedgehog’s strategy is simple and singular. Collin’s suggests that great organisations similarly have simple, singular things that they do better than any other organisations. This, he suggests, is far more effective than trying to do many things or trying to spread ourselves too thinly.

This is a good book to refer to in terms of developing your organisation’s visions and linking them to strategies of innovation and development. Collins, Jim (2006) “Good to Great and the Social Sectors: Why Business Thinking is Not the Answer”, Random House, London.

What you are deeply passionate about

What you can be best in the

world at

What drives your resource

engine

Financial Sustainability and Financial Decision-Making increasingly needs to be linked to the strategy and impact of community organisations. Increasingly funding links the two, and without a clear understanding of the linkages inside an organisation it becomes very difficult to make strategic and operational decisions.

One of the first challenges involved in generating assets and building financial sustainability in your community organisation is to create some visions and make some decisions about how financial management can underpin your community and social objectives now and into the future.

• Understand why your organisation wants to be around in the long term.

• What’s in the best interest of your constituents in terms of the future of the organisation?

• What’s the most cost effective and most impacting / constituent effective structure and size for our organisation?

• What is your long-term financial plan? What are the opportunities?

• In what ways can you link your financial plans to your social objectives? Jim Collin’s Hedgehog concept can help us to do this. Collin’s ‘Hedgehog Concept’ asks us what we’re passionate about, what we do best, and what the most effective way to resource this is.


“Itʼs not enough [for nonprofits] to have a high-impact program if thereʼs noeffective strategy for sustaining the organization financially. And neither is itenough to be financially stable. . . . Yet surprisingly, in the nonprofit sectorfinancial information and information about mission impact are seldom discussedin an integrated way. Instead, financial reports and analysis rarely include dataabout what impacts have been driven by a particular financial activity. Moreover,program evaluations and progress reports are discussed out of context withfunding streams, profitability, and financial sustainability”. ! ! Bell, J., Masoka, J. and Zimmerman, S. (2010) Nonprofit Sustainability: Making Strategic ! ! Decisions for Financial Viability, San Francisco: Jossey-Bass, p. 3

Linking Financial Sustainability and Social Impact for Strategic Decision-Making

2High Social Impact

Low Financial Sustainability

1High Social Impact

High Financial Sustainability

4 Low Social Impact

Low Financial Sustainability

3Low Social Impact

High Financial Sustainability

Financial Sustainability

Soci

al im

pact

The Impact / sustainability matrix map was developed by Jeanne Bell, Jan Masaoka and Steve Zimmerman, (2010). Their book, Nonprofit Sustainability: Making Strategic Decisions for Financial Viability, published by Jossey-Bass is worth investing in if you are looking to build strong foundations for your journey towards financial sustainability.

This matrix can be used at both organisational level and program level. It can be used in a quantitative and qualitative way. It can be helpful to get management and board decision-making happening effectively and quickly.

Increasingly funding models for non-profit organisations are looking at combinations of financial reward and social impact (eg. outcome based funding models). So, understanding the financial and impact integration of your programs is critical from a strategic perspective.


From an organisational perspective, the different positions in this matrix indicate the range of possible connections between financial sustainability and social impact. The following case studies illustrate these positions.

Position One: High Social Impact and High Financial SustainabilityStrong Women of the Hills is an organisation centred on assisting and supporting women who have experienced domestic violence in a fairly large regional city. They have grown from a small organisation ten years ago to one of the largest community organisations in the region that they serve. After a period of instability some years after they were formed, during which time they were forced to relocate numbers of times over the course of two years, the management committee and staff decided to ensure their long term viability by developing a building fund which they grew from donations and earned income. They were also bequeathed some money when one of their founders passed away. Despite some rigorous debate about how best to use this money, they eventually made the decision to buy their own premises so that they could develop a stable base and grow their future over time. Since this time they have almost finished paying off their loan, and have increase their equity in the property substantially. They have developed a strong connection to the area in which they are based. The building has also helped them to develop some further income streams as they rent out a few rooms to other organisations. Using the money from this they have been able to develop some very innovative programs which would not have been funded. Because they are seen as a stable, well managed, and innovative organisation they have also attracted a great deal more funding over the years. Their balance sheet now indicates that they are a strong, sustainable organisation that is making a real difference in the lives of the women it serves and in the life of this regional city overall.

Position Two: High Social Impact, Low Financial SustainabilitySunshine Valley Community Centre has been operating in the area for many years. They receive government funding for their activities which focus on the building of a strong local community and supporting those members of the community who are living on a low income or are otherwise disadvantaged. They have a good reputation in many ways – they have led many actions in the local community and are credited with making positive changes to some of the most pressing social issues in the area, particularly in relation to addressing homelessness and providing support for Indigenous members of the community. They have also recently won praise for some of their work with refugees and asylum seekers in Sunshine Valley. The staff and management committee are dedicated and hard working and very focussed on making a difference in Sunshine Valley. At the latest planning day, however, it was noted that their financial position was quite tenuous. They had not gained any new funding in over three years, and some of the project funding that was used to start very innovative work had finished and not been renewed. Staff indicated that they were working ever harder but with fewer resources as they were trying to maintain these projects despite the funding not being available. The organisation had no reserves to speak of and staff wages had not kept up with rises in other parts of the community sector. The funding that was still there came from two main sources and the management committee started to raise some concerns about the sustainability of this in the long term.

Position Three: Low Social Impact, High Financial SustainabilityCommunity Learning and Action Centre Ltd is a non-profit company started in the early 1980s to help provide adult education and employment opportunities in a depressed inner-city area of a capital city. For a while there was a great deal of energy around the centre and it attracted good funding and a range of donations for it’s work. With the help of some very enterprising board members the organisation was able to utilise the donations to purchase a two story building in the area it served and used this to help incubate micro-businesses and support enterprises by unemployed people in the area. Over time the area experienced a process of gentrification and the value of the property soared. The original aims of the organisation to develop jobs for people who were unemployed and to support the development of small businesses in the area started to wain as the demographics of the inner-city changed. The building is now housing a couple of commercial tenants and provides accommodation for an activist group, and the organisation still has one staff member who mainly works to train other organisations in how to support enterprises in the newer depressed communities located further out and on the outskirts of the city. The building is now worth several million dollars, and though the commercial rents still adequately cover the costs involved in maintaining the building, some board members are questioning whether it is still serving it’s purpose well. The board now seems to spend most of it’s time managing the asset and some members feel it has lost it’s way.


Position Four: Low Social Impact, Low Financial SustainabilityHighbridge Young People’s Support Service Inc. has been operating in Highbridge, a regional town for over ten years. They were started by a small group of young people who identified the lack of employment and leisure options for young people in the area. They were successful for a number of years in attracting funding and building up the service. They had an active management committee who built up a healthy reserve for the organisation over time. Two years ago they lost their main source of funding and had to scale down in size. They now only have one worker who works four days a week and a casual administration assistant. The reserve has served as the organisation’s capital base but it is now almost depleted. The sole worker has been very focussed over the past year on securing more funding but this has not been successful other than for a couple of short term project grants which really did not add to the organisation’s financial security. The pressure and focus on obtaining further grant funding has also mean that the core work of the organisation (ie. The support of young people in the area) has been quite neglected, with the sole worker having to fit this into whatever time she can find (she has consequently done a great deal of overtime work and has taken stress leave twice this year). The management committee is very concerned about the future of the organisation.

Let’s unpack some of the thinking and decisions that underlie this matrix – they can help us to identify how organisations link their financial sustainability to their social impact and this can give us insights into our own situation.

Imagine you are a key person in one of the organisations above. The idea of this exercise is to get into the head of this key person – there are no right or wrong answers to this exercise, we are merely trying to understand what motivates these different organisations.

What beliefs influence your organisation’s current position?

What decisions have been made to get to this point in the organisation’s history?

Where would you plot your own overall organisation on the matrix?

Where would different programs within your organisation sit on the matrix?

Are there particular beliefs or assumptions that influence this position in your organisation?

What decisions need to be made in order to change this position (that is, if you want to change your organisations position of course!)?

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“Nonprofit is a tax status, not a way of operating”# # # # # # Peter Kramer, Nonprofit Finance Fund, New York, 2013


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Degree of successful achievement of

outcomes(Score out of 5)

Degree of alignment to organisational

mission(Score out of 5)

Scale & Reach of the activity (ie. how many

people, how many disadvantaged people)

(Score out of 5)Weighting 40% 40% 20% Weighted

average:Women's support programSocial EnterpriseChildrenʼs education programCommunity garden

Using the Impact / Sustainability Matrix for Strategic Sustainability Decision Making within the Organisation

According to its authors (Bell et al, 2010), the above matrix can be used not only to explore our overall organisational status, but to begin to have strategic discussions within organisations about the relative value and contribution of particular programs and activities, therefore giving us a much better picture of our overall sustainability potential. This in turn helps us to determine the diversity and strength of our programmatic portfolio, and opens up lots of potential for strategic decision-making within organisations. The use of the matrix for this purpose is relatively straight-forward but it does need some practice and requires a dialogue (particularly around the impact of programs / activities).

Step One: Identify all the organisations ʻbusiness linesʼ (activities, projects, program that you undertake in an organisation)

Step Two: Assess the relative impact of each program / activity you identified above. This is not a formal evaluation type impact assessment, but an internal self assessment of the impact of each business line. It does require discussion and debate about what the indicators of ʻimpactʼ are, and whether, and if so, how each should be weighted according to its importance in the organisation and for the stakeholders. Below is a sample of how you can set this weighting out

Sample only! Determining the impact indicators and the relative weightings can be a political process and should be done with all relevant stakeholders!

Step Three: Determine the financial surplus or deficit associated with each program / activity

- Calculating a program / activityʼs full costs (direct costs, allocated portion of core operating costs, allocated portion of administrative costs);

- Calculating the total revenue that can be attributed to this program / activity- Calculating the surplus / deficit of the program / activity by deducting the costs from the revenue

Step Four: Map the results using excel and the bubble chart function

Below is a simple sample of how a summary may look on a spreadsheet, and below that is a sample of how this spreadsheet translate onto the matrix. The beauty of the matrix is that it can give management and board members alike a quick and insightful view of how each program / activity is tracking on both impact and profitability dimensions, and can therefore be helpful as a decision-making tool if the organisation is looking to grow its sustainability over time.


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Program/ Activity Profitability Impact ExpensesChildrenʼs education program -$21,282 3.85 $62,770Women's support program $2,593 3.25 $57,997Friday lunch program -$10,519 3 $66,992Social Enterprise $44,677 2.6 $100,581Job Support Program -$23,229 2 $23,229Arts Festival $13,943 1.5 $26,807Community Garden -$10,974 1.8 $25,974

Sample spreadsheet

Creating a visual picture of the spreadsheet creates the opportunity for strategic discussions about the strategic value of each activity, and its contribution to the overall sustainability of the organisation.

Each quadrant points to a strategic imperative for the decision-making:- The star quadrant performs best - and the temptation is to just leave it and focus on

problem quadrants, but the strategic imperative for this quadrant is to invest further attention and resources to grow these star activities;

- The heart quadrant requires attention to costs - these are high impact activities but with profitability issues. Keep the activities but concentrate on reducing costs or attracting new revenues;

- The money bag quadrant requires greater focus on impact, and nurturing to keep them healthy;


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Program/ Activity Quadrant Imperative Action

Childrenʼs education program

Keep and Contain Costs

Women's support program

Invest and Grow

Friday lunch program Keep and Contain Costs

Social Enterprise Invest and Grow

Job Support Program Close or Give Away

Arts Festival Keep and Increase Impact

Community Garden Close or Give Away

- The stop sign quadrant is strategically hardest, as no one wants to give up programs that may have had good intentions or that are someones passion...but if they are not delivering financial or impact benefits, then itʼs time to reconsider their future in the organisation.

You can use these strategic imperatives for action planning with management and board members. As a whole, the matrix is a great tool for exploring the intersections of impact and financial health, and for integrating these dimensions in our discussions of sustainability.

A critical but much overlooked part of building financial sustainability in your organisation is to understand the links between healthy finance and healthy impacts - and that these interconnection lead to hearty and strategic dialogue and decision-making inside organisations. The matrix tool is one way to initiate and support such dialogue. For more information, see the whole book which provides many more examples and uses for the matrix:

Bell, J., Masaoka, J. and Zimmerman, S. (2010) Nonprofit Sustainability: Making Strategic Decisions for Financial Viability, Jossey Bass, New York


Financial Health Checks

Your organisations financial health also depends on context, timing and on the timeframes you are working within. If your organisation is in survival or crisis mode, you probably need to focus on short-term resolutions and answers to questions such as:

- Are we able to pay our bills and salaries this month? In the next three months?- What does our budget say about our operational functioning now and into the next few

months? Are we performing well against our budget forecasts? Are there any unexpected variances?

- Do we have adequate liquid reserves to deal with an immediate funding crisis?

Alternatively, if weʼre planning for our future as organisations weʼre probably interested in different questions, such as:

- Do we have adequate and accessible reserves? For crisis? For innovation? For asset building?

-If so, how these reserves invested? -If not, how can we plan for development of reserves into the future?

-How are our core projects, programs, activities performing financially?-Are we recovering full operating costs from key funders (including management costs)?-Is the portfolio of our activities diverse and coherent enough, and does it support growing financial sustainability?-Are our revenue / income streams diverse and stable? Which ones are performing best / worst?-Are we developing our balance sheet appropriately to maximise our sustainability and our impact?

Thereʼs two key aspects to checking your organisations financial health -

a. Financial management and systems check: this gives the management and board members a clear picture of how they are travelling in relation to financial systems and decision-making. If there are too many gaps in your financial management system it can be risky and can mean that you donʼt have accurate financial data from which to make decisions;

b. Financial indicator check: this focusses on the realities of your overall financial performance and position, which in turn can provide an important foundation for making strategic decisions about your organisations future.

Both should be done regularly and be used as part of strategic decision-making processes.

The health checks on the following pages can provide some important information for our organisations decision making about sustainability.

The first is a systems check and should be used to open up discussion about whether our systems are adequate for our development of financial sustainability.

The second is based on key financial indicators and can be used to explore where we should be focussing our attention in relation to working towards sustainability.


Rating Indicator

Met Needs Work

N/A or don’t know

E Your organisation follows accounting practices that conform to accepted standards (eg. Standard Chart of Accounts)

E Your organisation has systems in place to provide the appropriate information needed by staff and board to make sound financial decisions and to fulfill funding and ATO requirements.

R Your organisation prepares timely financial statements including the Balance Sheet (or statement of financial position) and Statement of income and expenses (or statement of financial activities) which are clearly stated and useful for the board and staff.

R Your organisation prepares financial statements on a budget versus actual and/or comparative basis to achieve a better understanding of their finances.

E Your organisation develops an annual comprehensive operating budget which includes costs for all programs, management and fundraising and all sources of funding. This budget is reviewed and approved by the Board of Directors

R Your organisation monitors specific program costs and overhead costs through appropriate documented processes.

R Your organisation ensures that funding applications and agreements provide for adequate administration and overhead costs.

E Your organisation prepares cash flow projections.

R Your organisation periodically forecasts year-end income and expenses to assist in making sound management decisions during the year.

E Your organisation reconciles all cash accounts monthly.

E Your organisation has a review process to monitor that they are receiving appropriate and accurate financial information whether from a contracted service or internal processing.

E If your organisation has billable contracts or other service income, procedures are established for the periodic billing, follow-up and collection of all accounts, and the organisation has the documentation that substantiates all billings.

E Government contracts, service agreements and grant agreements are in writing and are reviewed by a staff member of your organisation to monitor compliance with all stated conditions.

E Payroll is prepared following appropriate State and Federal regulations and organisational policy.

R Your organisation has a written fiscal policy and procedures manual and follows it.

R Your organisation has a written policy related to investments.

R Your organisation has established a plan identifying actions to take in the event of a reduction or loss in funding.

R Your organisation has established or is actively trying to develop, a reserve of funds to cover at least three months of operating expenses.

E Your organisation has suitable insurance coverage which is periodically reviewed to ensure the appropriate levels and types of coverages are in place.

Financial Systems Health CheckAdapted from Carter McNamara, Greater Twin Cities United Way.

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E Your organisation has an annual, independent audit of their financial statements, prepared by a certified public accountant.

R In addition to the audit, the CPA prepares a management letter containing recommendations for improvements in the financial operations of the organisation.

A Training is made available for board and appropriate staff on relevant accounting topics and all appropriate persons are encouraged to participate in various training opportunities.

Indicators Ratings: E=essential; R=recommended; A=additional to strengthen organisational activitiesIndicators Ratings: E=essential; R=recommended; A=additional to strengthen organisational activitiesIndicators Ratings: E=essential; R=recommended; A=additional to strengthen organisational activitiesIndicators Ratings: E=essential; R=recommended; A=additional to strengthen organisational activitiesIndicators Ratings: E=essential; R=recommended; A=additional to strengthen organisational activities

How to Use the ToolThe checklist indicators represent what is needed to have a healthy, well-managed organisation. Since it is a self-assessment tool, organisations should evaluate themselves honestly against each issue and use the response to change or strengthen its administrative operations. Ratings:Each indicator is rated based on its importance to the operation and effectiveness of any nonprofit organisation. The ratings are:E: Indicators with an "E" are essential or basic requirements to the operations of all nonprofit organisations. Organisations which do not meet the requirements of these indicators could place their organisations in jeopardy. R: An "R" rating signifies that these indicators are recommended as standard practice for effective nonprofit organisations.A: Additional indicators which organisations can implement to enhance and strengthen their management operations and activities are rated with an "A". Checklist Responses:Organisations can respond in one of three ways to each indicators used:1. Needs work - An indicator that is marked as "Needs Work" implies that work has been done towards achieving this goal. The organisation is aware of the need for this indicator, and is working towards attaining it.2. Met - All indicators marked as "Met" demonstrate that the organisation has fulfilled as essential management need. However, the organisation should review these indicators in the future to be sure that their management remains healthy in view of the many internal and external changes which constantly occur in all organisations.3. N/A - Indicators marked as "N/A" can mean several things, including:- the indicator is not applicable to the management operations of this organisation- the organisation is not sure of the need to meet the requirements of this indicator- the organisation has not met, nor is working on this indicator presently, but may address it in the future All organisations should take note: All responses to indicators should be reviewed carefully to see if they could improve management operations. Indicators checked "N/A" due to uncertain applicability to the organisation must be further reviewed to determine if they should become a part of "doing business." If the assessors simply do not know what the indicator means, further information may be needed to accurately assess the feasibility of its application. Indicators marked "N/A" because they have not been met but that apply to the organisation, may require immediate attention. Technical assistance, consulting, or training may be required to implement these indicators.The indicators in this checklist should be informative and thought provoking. The checklist can be used to achieve not only a beginning level of good management, but improve existing management to provide the organisation with greater stability, reliability and success in the nonprofit community. It is also a useful too if an organisation is experiencing management problems, to help pinpoint any weaknesses so action can be taken or assistance sought to improve the organisations health. All organisations should use the checklist to re-assess themselves periodically to ensure compliance with established rules and regulations, and to continue improving administrative health through the indicator's helpful suggestions.This tool was developed by Carter McNamara for the Greater Twin Cities United Way, USA. We have adapted it for use in Australian contexts and with the key aim of preparing organisations for Community Asset Building. The provision of this checklist does not constitute the rendering of legal, tax or other professional services.


Financial Indicator Health Check

Indicator Red Orange Green Rating

1 Consistent surpluses

Consistent and/or growing deficits

Consistently break-even or periodic surpluses which do not cover full operational costs

Consistent surpluses covering full operational costs and contributing to healthy balance sheet

2 Revenue Stability and Reliability

Revenue base is dominated by non-recurrent, shorter term dollars

Revenue base is split between recurrent and non-recurrent sources, but organisation has a track record of attracting recurrent dollars

Organisation has a strong base of attracting recurrent funding, and this constitutes the majority of the organisations current revenue base

3 Revenue Diversity / composition(esp. unrestricted)

The organisation is reliant on only one or two types of revenue, or one or two sources of revenue

The organisation is starting to develop other sources of income, but the majority of revenue is still of particular types or sources

The organisation has a diverse revenue base comprised of different types and sources

4 Expense size and growth

The organisations expenses have grown and /or diversified substantially over the past year or part thereof

The organisations expenses are relatively stable, but have not been reviewed for some time

The organisation regularly reviews expenses and takes action to ensure that expenses align to budget projections.

5 Full cost coverage

We donʼt know whether funds cover full costs, or we know that they donʼt.

Some programs / activities are full cost recovery, but some are not.

The majority of programs / activities in the organisation operate in ways that ensure full cost coverage

6 Program / activity financial performance

Programs and activities not individually analysed according to cost recovery / surplus generation / expenses

Some financial performance assessment undertaken of programs and activities but not analysed for strategic purposes

Financial performance of programs and activities regularly undertaken and used in strategic and operational decision-making

7 Diversity of program / activity portfolio

No assessment of sustainability / impact of the overall portfolio or mix of programs

Some attempts made to build a sustainable portfolio of activities based on financial and impact assessments

Diverse and sustainable portfolio of programs / activities that align social impact and financial sustainability measures as much as possible.

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The following dimensions have been identified internationally as key indicators of financial health in not-for-profit organisations. You may not initially know how to rate every one of them, but rate your organisation on as many as you can. The ratings used here are traffic light ratings - designed to give us a quick snapshot of key areas that may need attention.


8 Current RatioCurrent AssetsCurrent Liabilities

Ratio of current assets to current liabilities is close to or below 1:1

Current ratio is between 1:1 and 3:1

Current ratio is greater than 3:1

9 Reserves The organisation has a reserve of one or less months of operating expenses

The organisation has a reserve of between one and three months of operating expenses

The organisation has a reserve of between four and twelve months of operating expenses

10 Asset Development and Composition

There are no plans to develop assets in the organisation

The organisation has ideas and some plans to develop assets but progress is slow or negligible; or the organisation has assets which are not building sustainability and impact

The organisation has plans which are being realised to develop assets, and to use these assets to leverage greater sustainability and impact

11 Investment Idle cash is left in the everyday / transaction account

Idle cash is moved to a higher interest bearing account

Idle cash and reserves are appropriately managed, reviewed and invested in accordance with organisational investment policies

12 Cash Flow Cash flow is problematic for the organisation. Lumpy cash flow regularly results in stress and difficulties paying bills on time.

Occasional cash flow issues which the organisation weathers and responds to on a case by case basis

Cash flow is either not an issue or is appropriate managed through forward planning and projections and/or a line of credit. Cash flow projections are part of management and strategic decision-making.

13 Budget Variances

There are regular and large variances between budgeted and actual income or expenses. These are not appropriately or actively responded to.

Some variances between planned and actual income / expenditure, but these are discussed and the organisation is still on track to maintain the planned for outcomes

The budget is regularly reviewed and the organisationʼs income and expenditure is on track for the year. Budget planning and review are part of the board and management decision-making cycles.

Sources: the above table was compiled using a range of resources, including but not limited to, the following:

Bell, J. and Schaffer, E. (2005) Financial Leadership for Nonprofit Executives: Guiding Your Organisation to Long-term Success, Compass Nonprofit Services, Fieldstone Alliance, New York

Kramer, P. (2013) Top Ten Indicators of Nonprofit Financial Health, Nonprofit Finance Fund Blog, 16/4/13, available at: http://nonprofitfinancefund.org/blog/top-indicators-nonprofit-financial-health


http://nonprofitfinancefund.org/blog/top-indicators-nonprofit-financial-health

http://nonprofitfinancefund.org/blog/top-indicators-nonprofit-financial-health

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From the above table, it is possible to explore some of the key areas which your organisation may need to focus on in order to build sustainability. The areas below and their links to the table may provide some starting points - however there are other pathways that your organisation may take in response to the discussions which the health check sparks.

REVENUE FOCUS: (especially 2 + 3; but also 1, 5, 6, 12 + 13)If your health check indicates a few issues in the stability, reliability and/or diversity of your revenue base, you may consider exploring other opportunities. Do you need to invest in building capacities in other areas? Do you need to tap into your networks more effectively? Do you need to review particular sources of revenue that donʼt allow for cost recovery or surplus development?

EXPENSE FOCUS: (especially 1, 4 + 5; but also 6, 7, 12 + 13)If expenses are growing, or deficits are becoming more common, or there are growing numbers or ranges of budget variances, and if there are numbers of programs that are now operating in deficit, even though they are delivering well on impact goals, then it may be time to take a closer look at expenses, and how they can be more effectively managed. In the short term this may not mean cuts necessarily, but maybe investing in greater productivity.

SURPLUS and PERFORMANCE FOCUS: (especially 1, 5, 6 + 7; but also 11 + 13)If both organisational and program / activity deficits are increasing, and itʼs becoming more difficult to get to cost recovery, then you could look at either of the above, or at greater focus on tracking performance over time, and strategically monitoring those funding sources that make surplus generation (or even cost recovery) increasingly impossible.

ASSET and INNOVATION FOCUS: (especially 9, 10 + 11, but also 3 + 1)If your organisation is doing well on most of the earlier indicators, and is looking to grow, strengthen, deepen or expand itʼs base, then you could be looking at an asset and innovation focus, particularly if you have a diversified income base and good net worth. This may not only be focussed on physical assets (see next page).

PLANNING, GOVERNANCE and ANALYSIS FOCUS: (especially 6, 7, 8 + 13; but also 1, 9 + 11)If you could not answer many of the questions, or you have not scored well on those that require, for example, performance measures, or well developed budgets, the focus may not be on financials as such but on developing systems for planning, governing and analysing your financial performance and position.

SAVINGS FOCUS: (especially 8 + 9)If your current assets are low, your current ratio is closer to 1:1 than it should be, and/or your reserves are low, then your focus should be on building savings in the first instance. This then also necessitates a surplus and performance focus as surpluses build net assets, and deficits deplete them.


Assets What they can leverage Key financial considerations

- Savings that are unrestricted can leverage other sorts of assets - physical (buildings) or human assets (skilled leaders or staff); they can also leverage innovation and impact without external funding restrictions

- Ensuring that retained earnings are unrestricted (check whether unspent surpluses can be retained and are unrestricted for example);

- Ensure higher interest investment opportunities for savings;

- Think about potential impact leverage not just financial benefit.

- Purchasing physical assets can lead to greater stability, forward planning, opportunities for earned income, greater connection to place for increased impact.

- Physical assets can potentially have major benefits financially and from an impact perspective.

- Does your organisation have the capacity and capability to engage in physical asset development?

- What could your organisational asset building grow from a financial and an impact perspective?

- Can you organisation manage debt?

- Investing in people at critical moments in an organisations life can have significant impacts on sustainability over the long term. It may mean bringing in new key staff, or it may mean investing in existing staff to increase their capacities and capabilities, resulting in potential productivity improvements and greater impact.

- What are the potential costs and benefits of investing in people?

- How can the benefits be retained in the organisation over the long term?

- Do we have forward projections to explore how investing in people now may benefit us over the medium and long term, even if it costs us now?

-Your capacity to deliver and to measure your impact can leverage greater resources and revenue, especially as funders move towards outcome-based funding. Establishing data collection, analysis and impact measurement frameworks can require initial investment, but if done well, can bring in future revenue.

- Shop around and potentially develop in-house capacities for impact assessment as there are many expensive options out there which may not benefit you in the long term!

- Developing systems that enhance rather than reducing productivity is critical as you donʼt want staff consumed by data!

- Many not-for-profit organisations have an extraordinary range of skills, knowledge and data that could provide the basis for some intellectual property assets. You may not want to generate income from these, but you may want to develop them to increase opportunities for a diversity of revenue.

- Intellectual property can be a tricky and expensive area...so look carefully at costs and benefits of pursuing the most protected commercial options.

- In the first instance, recognise and plan for how your knowledge and skills can enhance revenue streams, rather than planning huge and expensive projects.

Financial Assets

Physical Assets

Human Assets

Impact Assets

Intellectual Assets

A note on Asset Development: It’s about more than Buildings!


Statement of Financial Performance

Shows how our organisation has been performing financially over a particular period of time (eg. month, quarter, year). This is a summary of our financial activity over time – what came in, what went out and what’s left.

Most important information: Incoming $, outgoing $ and the bottom line (overall profit or overall loss)

Most important questions: Has our total revenue over this period increased or decreased? Why?Have our total expenses increased or decreased? Why?What is the overall effect of these changes on our bottom line?

Also called: Income Statement; Profit and Loss Statement; Income and Expenditure Statement.

Statement of Financial Position

Gives us a snapshot of our organisations financial position at a particular point in time – what we own, what we owe, what resources are available to us. It allows us to see that what we own and what we owe are in balance – that’s why it’s also called ‘the balance sheet’. The balance sheet provides the best picture of our overall financial health.

Most important information: What we own (assets), what we owe (liabilities), what’s available (net worth).

Most important questions: Do our current assets exceed our current liabilities?Have our total assets increased or decreased? Why?Have our total liabilities increased or decreased? Why?What has been the effect on our net worth?Is our net worth growing over time, or shrinking? What impact will that have on the organisation over time?

Also called: Balance Sheet.

BudgetHelps us to spell out our financial needs and goals for the next period (usually a year). Budgets help us to plan our finances for the future by estimating our income and our expenses in relation to our work. Budgets can be used alongside other financial statements to check how we are going in relation to our needs and targets, to help us to stay focused on what is important to us, and to monitor and account for our income and expenses.

Most important information: That there is enough money in the budget to meet all resources and expenses for the period covered.

Most important questions: Have all income and expense items been identified?Are you satisfied that they are as accurate as possible?How often will you review the budget?Are we on track with our financial plan for the year?Are there any unanticipated items on our actuals that mean we need to review our budget plans?

Cash FlowShows us how the money is flowing in, through and out of our organisation. It helps us to analyse and predict the cash activity: where the money is coming from, where it is going to and whether we have enough of it to fulfill all the things we want to do at any point in time (it can help us to answer important questions like, do we have enough money for the payroll this month!). It’s different to the income statement because it focuses our attention only on what is happening to the cash in our organisation, rather than looking at our whole financial performance.

Most important information: Inflows of cash, outflows of cash, timing of funds in and out over a particular period (this is important because the income for many non-profits is lumpy – comes in lumps and leaves in lumps…and there can be times when cash is scarce. We need to be prepared for these times so that we’re not left short).

Most important questions:Which months / periods are we at risk?How will we manage the cash flow during this period?What is our continuing plan if we expect to run low on cash?

Four Financial Statements Supporting Assessments of Financial Viability and Sustainability


Some definitions of financial terms. Some definitions of financial terms. Some definitions of financial terms. Term Simple definition More detailed definition

Accrual Accounting for a cost that will happen.

Revenue and costs are recognised as they are earned or incurred, not as money is received or paid.

Assets All the things that have a value. Any tangible or intangible object that is of value to the possessor. In most cases it is cash or can be turned into cash. Also includes prepayments for rent, rates etc For tax purposes, assets may be treated differently..

Capital investment

Investment in the assets of your organisation that is expected to provide a return

The wealth whether money and property owned or employed by your organisation to create more wealth.

Contingent liabilities

An obligation that depends upon the occurrence of an event.

A liability that, at balance date , can either not be measured or can only be anticipated to arise if a particular event occurs. For example a court case pending against a company, the outcome of which is uncertain.

Credit A payment into an account. Also, an entry on the right-hand side of an account in double-entry book-keeping; the sum of money that your are allowed by a company before you are required to pay; the financial standing of your organisation;

Current assetsYour working capital. Assets that form part of your working capital and are turned over frequently in the course of trade. Includes stock in trade, debtors and cash.

Debt The amount you owe. Also a funding instrument such as a bond or promissory note.

Earned income

Money acquired through personal exertion.

Income generally acquired by personal exertion of the taxpayer as distinct from the passive income as dividends from investments.

Financial investment

Getting the best return. The purchase of assets for the principal purpose of a financial return as income and/or capital gain.

Inventory A detailed list of all the things that your organisation owns

A detailed descriptive list of articles including the identification number, model, quantity and value of each

Liabilities An obligation to pay a debt. An obligation especially for payment. A debt or pecuniary obligation. May be secured or unsecured. May be current or long term

Liquidity Cash Assets held in cash or in something that can readily be turned into cash with minimal capital loss (e.g. deposits in a bank account, trade debts, marketable investments.)

Net worth What you are worth after all the bills have been paid.

Total assets less total liabilities. It would normally be necessary to assess the true market value of assets rather than their value reflected in the books.


Ratios The proportion of one thing to another.

The relation between two similar magnitudes in respect of the number of times the first contains the second. For example the ratio of 5 to 2. Ratios are used to evaluate an organisation’s performance. For example the return on capital employed can be used to assess profitability.

Revenue Income The collective amount of income in any form.

Restricted May be used only for specified purposes.

Limited or confined to use for specified purposes.

Unrestricted Money or assets that can be used without restriction.

Money and other assets on which a donor, or grantor does not place restrictions of use. Money earned by an organisation on which there are no external restrictions of use.


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