All businesses (including non-profit organizations) must produce a financial statement at least annually, and often quarterly. This financial statement includes a balance sheet, an income statement, and a cash flow report, and possibly other supporting documents. These various reports will spell out the financial activities of the organization during that time period, detailing all income and cash outflows including operating expenses, salaries, and the like.
The financial statements of non-profit organizations are pretty much the same as those of for-profit companies, but the amounts allocated to the operational activities can be very different depending on the structure and activities of the organization.
Tips For Non-profit Organization Financial Statement Analysis
First, take the time to research the sector the non-profit operates in and their mission and activities. Understanding the mission and the basics of their operations will help you understand their financial statement. A Boy's Club type organization, for example, might seem to have high assets relative to their operating budget as they own a couple of buildings and several fields, but have to get by on a very limited annual budget with municipal or county funds.
Carefully examine the total compensation packages of the management employees of the non-profit organization. Salaries and compensation packages vary a great deal among non-profits, with the size of the organization being a significant factor, but the sector of the non-profit is also important.
For example, medical and healthcare non-profit organizations usually have to pay higher salaries to their top executives as multi-talented doctors receive higher salaries in related fields. In general, however, the rule of thumb is that executive-level non-profit management salaries are 20% lower than similar positions in the private sector. The general thought is that a willingness to work for less money is a sacrifice that demonstrates commitment .
Administrative Costs and Fund-raising Expenses
Consider the administrative expenses and fund-raising expenses of the non-profit. The National Charities Information Bureau (NCIB) mandates that organizations spend a minimum of 60% of their annual budget on program activities, and obviously the higher the better. Most experts also suggest that fund-raising expenses should not exceed 25%, and in fact should be 10% or less for non-profits that operate mainly on government monies.
Keep in mind that newer non-profits will have higher start-up costs than established non-profit organizations, especially for both marketing and development, and one has to expect the administrative and overhead percentage (compared to dollars spent on program activities) to be significantly higher for the first few years.
References
Basic Guide to Non-Profit Financial Management
How to Read a Non-profit's Financial Statement
For more information on financial statements and financial statement analysis and investing in general see:
Financial Statement Analysis – How to Read a Financial Statement
Corporate Finances – Understanding Corporate Financial Results
Accounting Standards–US & International Accounting–GAAP & IFRS
Actuarial Science - Statistical Methods in Insurance
Trading Options – Requirements for Trading Stock Options
Clayton Browne - Clayton Browne has a BA and an MS in Anthropology, and has been writing professionally since 1994. He worked for many years in both ...
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