Giving Compass' Take:

Nonprofit Finance Fund shares six key indicators of nonprofit financial health that funders should look for before donating.

The article advises looking at a nonprofit's track record for bringing in recurring dollars each year. Have you used this metric to measure financial health in the past?

• Read about the financial health of the entire nonprofit sector. 

In a world where the last two years have produced 90% of all data ever created (so says IBM), there is something to be said for avoiding information overload. This is especially true for nonprofit organizations whose leaders must constantly balance money and mission while marshaling ongoing evidence of social and financial performance.

How can nonprofit executives, funders, and advisors identify what matters most when examining finances? What are some trends and indicators that can guide us through an abundance of data and help assess true financial health?

You can also use the tool to see how one organization’s financial metrics and ratios stack up against its peers.

Here are income indicators:

  • Revenue reliability: Rather than overly focusing on the ratio of earned to contributed revenue, we suggest evaluating revenue reliability – an organization’s track-record of bringing in recurring dollars, on an unrestricted operating basis, year after year.
  • Consistent surpluses: A healthy business model is one characterized by reliable revenue that covers operating expenses and contributes to surpluses – all in the service of mission.
  • Full cost coverage. Nonprofit leaders are encouraged to set revenue targets high enough to cover not just their direct and indirect operating expenses but also the full costs of doing business

Here are balance sheet indicators:

  • Ability to manage debt. Debt is a critical financial tool that can help organizations manage the ebbs and flows of cash for operations, facility purchases and upgrades, and more.
  • Ability to steward facilities. If an organization owns property and equipment, it has a responsibility to maintain and replace these assets over time.
  • Appropriate liquidity. There are a number of ways to measure liquidity, the resources available to absorb risk and respond to new opportunities.

Read the full article about nonprofit financial health by Peter Kramer at Nonprofit Finance Fund.