How to Understand Nonprofit Financial Statements
Both for-profit and nonprofit business organizations must produce financial statement at least annually and, in most cases, quarterly. This financial statement includes at a minimum a balance sheet, an income statement and a cash-flow report. Taken together these documents will detail the financial activities of the organization during that period of time, specifying all income and outlays including operating expenses and salaries. The financial statements of nonprofit organizations are basically the same as those of for-profit companies, but the amounts budgeted to specific operational activities can be quite different, depending on the structure and purpose of the nonprofit.
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Instructions
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What to Look for in Nonprofit Organization Financial Statements
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Research the area the nonprofit operates in and its mission and activities. Understanding the mission and the operations it must undertake to accomplish it will help you understand its financial statement. A Boys and Girls Club, for example, often will have high assets relative to the operating budget as it might own a couple of buildings and several fields, but has to get by on a shoestring annual budget with limited city and/or county funds.
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Carefully examine the compensation of the employees of the nonprofit organization. Salaries and total compensation packages do vary significantly among nonprofits, with the size of the organization being one important factor, but the field the nonprofit operates in also makes a big difference. Medical and health care-related nonprofits, for example, often have to pay higher salaries to their top executives as top-tier doctors can command higher salaries in related fields. According to the U.S. Bureau of Labor Statistics, in 2007 nonprofit management positions earned $34.21 per hour and private sector management positions earned $41.86 per hour, meaning nonprofit executives were paid almost 20 percent less than equivalent jobs in the private sector. This apparently is because a willingness to work for less money is a sacrifice that indicates a commitment to the cause.
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Carefully examine the administrative expenses and fund-raising expenses. The National Charities Information Bureau (NCIB) requires organizations to spend a minimum of 60 percent of their annual budget on direct program activities and, obviously, the higher the better. Fundraising expenses should not exceed 25 percent and should be 10 percent or less for nonprofits that operate mainly on city or county funds.
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Remember that new nonprofits will have higher start-up costs than more established nonprofit organizations, especially in terms of marketing and development, and you have to expect the administrative and overhead percentage (relative to dollars spent on program activities) to be somewhat higher for the first couple of years.
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References
- Photo Credit Financial report and pen image by PaulPaladin from Fotolia.com
