In Part I of this two-part look at financial analysis for nonprofits, Rebecca Thomas gave insight into the “why” of financial statement literacy. Continuing here, she uses Financial SCAN as an example to share what can be achieved when financial analysis becomes a regularly used tool among others in the box. (Financial SCAN is a product that combines GuideStar data with Nonprofit Finance Fund (NFF) analysis.)
With nonprofit financial analysis and with Financial SCAN, in particular, the intent is not to pick winners or losers; rather, it reflects our belief that organizational and environmental context are essential to every investment decision.
The idea is to hold a mirror up to a nonprofit’s financial condition and encourage the sector’s supporters to engage organizations in dialogue and continuous learning about the story behind the numbers.
Further, we are advocating and applying metrics that shed light on overall financial health, assessing key vital signs associated with an organization’s profitability, revenue and expense dynamics, balance sheet composition, and liquidity.
By highlighting metrics and trends most closely associated with financial vitality, an organization can illuminate how well it is supporting its programs and operations and what kinds and amounts of resources it needs to more fully advance its mission.
A robust peer comparison component also allows users to benchmark the financial performance of one organization against a peer group, bringing increased transparency to the health of like organizations and greater perspective about the constraints experienced by different sectors.
With Financial SCAN, our goal is to bring clarity to the question of what to measure and why it matters – and to do so in plain English!
We want to shift the dialogue away from, “How are you, nonprofit organization, spending my money?” to “What do you really need to be stable and effective?’
In this context, we are excited to be a part of Market for Good’s efforts to strengthen the social sector’s information and knowledge-sharing infrastructure: robust financial analytics need to be one tool in a knowledge commons bringing meaning and insight to data.
Certainly, financial analysis alone is an insufficient measurement of an organization’s long-term impact. But NFF has seen in our more than thirty years of financing and advising the sector that organizations with a strong financial foundation – characterized by reliable, recurring surpluses, sufficient working capital, and long-term savings – are far more likely to sustain and scale the social outcomes that most organizations and their investors are really after.
Improved funding and financing practices and stronger organizational health are important because they are a means to the end of stronger, more vibrant communities.