5 Things to Look for in Non-Profit Financial Statements

The Salvation Army recently released its Annual Review. Here’s what you should look for in its financial statements:

1. % of Fundraising Costs to Total $ Raised
This percentage will provide insight into the actual cost associated with raising funds within the non-profit organization. A high ratio will be an indication that the charity may be engaged in inefficient or inappropriate means in obtaining donations. The Canada Revenue Agency has set 35% as the upper limit of an acceptable ratio.

2. Total Spending on General / Administrative and Fundraising Costs in comparison to Program Costs
Typically this is measured by determining how much of each donated dollar is spent on administrative and fundraising costs versus how much is spent on direct program and services. In general, spending 75-80% of funds on program related costs would indicate efficient operations.

3. Consistency in Operations
Although non-profit organizations can operate with a surplus or a deficit in any given year, continual deficits may be a cause for concern. Large fluctuations in results without explanations or rationale are a potential warning sign. The more consistent operating results are the more confidence the organization will gain from donors and funders.

4. Sufficiency in Reserves
An organization should have sufficient unrestricted reserves on hand to cover operations for a number of months. The net asset balance (total assets less total liabilities) will include a portion which is restricted (for a specific purpose or to be held permanently, such as an endowment) and a portion which is unrestricted. The unrestricted portion should be used in this calculation.

5. Liquidity
The ability to meet obligations as they become due is important to the longevity of the organization. Dividing current assets by current liabilities will give you the current ratio. A ratio of less than 1.0 will be a signal of liquidity problems looming in the horizon.