understand financial statement

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Understanding and Evaluating the FinancialStatements of Not for Profit Organizations

Approach to Ratio Analysis

1.Measurement of financial performance by ratio analysishelps identify organizational strengths and weaknesses bydetecting financial anomalies and focusing attention onbusiness.

2.Ratio analysis is a well established tool to evaluate anorganization’s profitability, liquidity and financial stability.

As such it can be used to answer a variety of questions.

Without money, no mission, no matter now meritorious,can be achieved. (Bryce, 1992, p.8)



Statement of Financial Condition The Statement of Activities provides information on the operatingactivities of a nonprofit between one date and another.

National Youth Training and Resources Organization Comparative Statements of Financial Position For the Years Ended December 31, 1999 and 2000 2000(Rs.) 1999 (Rs.)Assets Cash 200,000 142,000Pledges Receivable (net) 120,000 65,000Investments 755,000 700,000Prepaid Expenses 15,000 13,000

Fixed Assets (net) 220,000 40,000Total Assets 1,310,000 960,000

Liabilities and Net Assets Liabilities Accounts Payable 50,000 60,000

Grants Payable 25,000Refundable Advances 20,000Long Term Debt 200,000Total Liabilities 295,000 60,000



Net Assets Unrestricted 325,000 300,000Temporarily Restricted 45,000Permanently Restricted 645,000 600,000Total Net Assets 1,015,000 9 00,000 Total Liabilities and Net Assets 1,310,000 960,000

Questions Asked to Assess Financial Performance 1.Mission

•What is your organizational mission?

•Is the mission consistent with the stakeholder’s values?

•How does that translate into goals and objectives?

•What is the business model/strategy?

•What are present obstacles to fulfilling the mission?



2. Service Delivery

•What is the demand for these services?

•What type, volume and quality of services are delivered?

•Are these services compatible with mission?

•Are they meeting goals and objectives (are spent on right stewardship

things)?•What are present obstacles in service delivery?

3. Organizational Management

•What is the experience and expertise of management?•What is the quality of internal support systems?

•What is the administrative efficiency?

•What is the appropriateness of compensation?



4. Organizational Funding

•What cash funds are available?•What non-cash contributions (goods, services volunteers) are used and

available?•How financial supportive are board and community?•How financial supportive are commercial activities?•Is there continuity of support and diversity of income streams?•How compatible is the funding with the mission?•How efficiency is fundraising and development?•What are present obstacles in funding and support?

5. Financial Health

•What is the cash flow position?•How financially stable is the organization?

•Does it have accumulated wealth to sustain it if funding is reduced?

6. Financial Management

•What is the quality of internal control system?•How prudent is the cash and investment management?

•Are non-financial assets prudently managed?



Model of Financial Performance in Relation to its Goals in Non-profitManagement



Ratios which are useful

1. Accounting Equation

Assets = Liabilities + net assets

= Outstanding Debts + Assets financed by thepromoters (net asset)

Non-Profit - Net assets > + increase in Revenues

< - decrease when expenses are recorded

For Profit = Net profit is added to net worth.

2. Performance - Analysis of Expenses

Current expenses

Capital expenses

Reserves



3. Analysis of each type of expenses as a percentage of total expenses.

Expenses Ratios

a. Program Expensesb.Administration/Salaries and Wages/Overheads

c.Trend analysis in expenses over a period of time

4.Comparisons in Relation to Budget

Analyze results achieved against budgeted expenses and income

5. Liquidity Ratios

- Current Ratio : Current Assets : Current liabilities

- Acid test Ratio : Quick Assets : Quick Liabilities

- Networking Capital : Current Assets – Current Liabilities = NWC

- Ability to Pay – Monthly Expenses : Monthly Revenue



6. Financial Distress

a) Net Assets : Total Liabilities :Extent other people

funds for purchasing assets

b) Total Revenues : Total Expenses – Comparison of Major expenses tototal revenue.

7. Profitability

Total assets employed : Total Revenue Generated (internal + External)

8. Sustainability

Revenues from donors/Contributors : Total expenses

Internal Generation : Total expenses

Debt burden Ratio = Total borrowing : Total Expenditure



9. Whether Regular income is received from Members/Donors

Comparison over five year period

Total membership/Donor income : Total Expenditure

10. Membership satisfaction

Total members/leaders this year:

Total members/Leaders is the Base year

Membership Retention = Members This year:

Members in Base year

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