3 Financial Ratios and Benchmarks Nonprofits Must Know

Liquid assets, such as cash and marketable securities, are readily available to meet short-term obligations, whereas illiquid assets, like real estate, may take longer to convert into cash. This distinction can significantly impact the organization’s ability to respond to financial challenges and opportunities. A gain is measured by the proceeds from the sale minus the amount shown on the company’s books. Since the gain is outside of the main activity of a business, it is reported as a nonoperating or other revenue on the company’s income statement.

• Essentially, net assets are the nonprofit equivalent of equity in for-profit entities.
• You’ll also need to have a balance sheet and a snapshot of your organization’s finances at the beginning and end of the year when filing IRS tax form 990.
• It provides a detailed overview of the revenue and expenses of the organization for a specific reporting period.
• These principles and practices ensure that a nonprofit’s financial statements accurately reflect its financial status and adherence to legal and ethical standards.
• For example, a donor might establish a scholarship fund that requires the principal to be preserved, with the interest earned used to award scholarships annually.

When do nonprofits need a Statement of Activities?

• These funds are designed to provide a perpetual source of income for the nonprofit, with the principal amount remaining intact while the investment income is used for specific purposes.
• Whether you are a nonprofit professional looking to refine your financial management skills or a board member seeking to ensure your organization’s compliance and sustainability, these resources can be invaluable.
• Independent audits may be required for organizations receiving certain levels of federal funding, typically when expenses exceed $750,000 annually.
• The U.S. Internal Revenue Service (IRS) requires some tax-exempt nonprofit organizations to file Form 990 (some can file Form 990-EZ) each year.
• If you find that you don’t have enough unrestricted revenue for all of your expenses, it’s likely time to look for ways to cut costs or revisit your fundraising predictions to see if it’s possible to earn more.
• They represent the residual interest in the entity’s assets after deducting liabilities, offering insights into its overall stability and capacity to meet future obligations.
• Monthly reports should include both absolute amounts and ratios that provide context for financial health.

Sharing how your nonprofit’s financial status has changed gives board members, donors, and foundations a better overview of the health of your nonprofit. Benchmarking is an integral component of financial management for nonprofits, providing a framework for evaluating performance against established standards. By comparing financial ratios and metrics to https://greatercollinwood.org/main-benefits-of-accounting-services-for-nonprofit-organizations/ industry benchmarks, nonprofits can assess their operational effectiveness and identify areas for improvement. This process enhances transparency and accountability while helping organizations align their financial strategies with best practices.

Understanding Net Asset Categories for Nonprofit Organizations

In addition, as part of the annual audit process, auditors will validate asset classifications to ensure the organization has properly recorded all restricted contributions. They will also review all releases from restrictions to ensure the organization is spending funds appropriately. Nonprofits can maintain transparency by providing regular, detailed reports to donors on how their funds are being used, engaging in open communication, and being responsive to donor inquiries and concerns. Many grants have these policies in which you must either spend all of the funding received, or pay back the remainder.

Managing Net Assets Released from Restrictions in Nonprofits

Donor-restricted funds introduce a level of complexity in nonprofit 5 Main Benefits of Accounting Services for Nonprofit Organizations accounting. Mismanagement or misuse of these funds can lead to legal consequences and damage the organization’s reputation and donor relationships. The debt to equity ratio measures liquidity and shows how much debt versus revenue is being used. To clarify, the new financial statement presentation of net assets provides improved information for donors, grant makers and other funding sources.

Understanding Nonprofit Net Assets

These are funds that have been designated for specific purposes by donors or grantors, but their restrictions are time-limited. In other words, there is a predetermined period during which the funds must be used for the intended purpose. Footnotes in financial statements also play a crucial role in providing context and additional details about net assets. These notes often include explanations of significant accounting policies, descriptions of restrictions on net assets, and information about contingent liabilities or commitments. For example, a footnote might detail the terms of a donor’s restriction on a large contribution, offering transparency and clarity about how these funds can be used.