1. Tools to determine the financial health of a nonprofit:
   1. LOOKING CLOSER: Review and consider which method or combination of methods would work best for the needs of your organization:
   2. Use the auditor's report
      1. An auditor's report is a written opinion of an auditor regarding whether an entity's financial statements are fairly presented and in accordance with GAAP. The report is written in a standard GAAS (Generally Accepted Auditing Standards) format. A negative report is a qualified report/statement
         1. What do you want to avoid a qualified auditor's report/statement?
            1. Hire an outside consultant that handles compilations (level C assurance) and/or reviews (level B assurance), await the auditor's report (level A assurance)
   3. Use horizontal analysis
   4. Use vertical analysis
   5. Use expense proportion analysis
      1. Analyze the portion between program expenses and management expenses
         1. TIP: Add fundraising expenses as a line item within management and administration
         2. TIP: Use these ratios
            1. TIP: Use these ratios
            2. Total program expenses
            3. divided into
            4. Total expenses
            5. TIP: Use these ratios
            6. Total fundraising expenses
            7. divided into
            8. Total expenses
            9. TIP: Use these ratios
            10. Total management and administration expenses
            11. divided into
            12. Total expenses
            13. TIP: Use benchmarks as indicators
         3. TIP: Use consistent bookkeeping to obtain reliable ratios
            1. Use consistent classification for every expense
         4. Real world examples:
            1. You will notice that in 1985 the mean standard was about 20% of all costs allocated to overhead. By the year 2005, the standard moved to less than 10% of all costs allocated to overhead. A significant change.
   6. Use fundraising effectiveness ratio
      1. TIP: Classify fundraising activities by type (e.g. classify transactions by contributions and fundraising and the method which each was incurred/earned).
         1. TIP: Use this method only after careful consideration of the cost and effort needed to use it effectively.
   7. Use revenue concentration analysis
      1. TIP: Diversify contribution/fund sources
      2. TIP: Broaden the large donor base
   8. Use traffic light revenue analysis
      1. TIP: Allocate revenues among colors indicated 'green' as the most reliable fund/contribution source and subsequentially 'yellow', and 'red' as the least reliable fund sources
         1. Allocate more resources to the programs that have more 'green' reliable fund/contribution sources
   9. Use traditional ratio analysis
      1. Liquity ratios
         1. Current ratio
            1. Current assets
            2. divided into
            3. Current liabilities
            4. Advantage: This ratio is preferred by the public. The ideal ratio is a 2 to 1 ratio or higher.
            5. An example: A nonprofit may have a ratio that increase from 2:1 to 1:1. This could indicate that the nonprofit is experiencing increasing cash shortfalls that prevents it from keeping up with AP
         2. Quick ratio
            1. Cash
            2. plus
            3. Marketable securities
            4. plus
            5. Accounts and pledges receivables
            6. all above divided into
            7. Current liabilities
            8. Advantage: This ratio matches only assets that can be quickly liquidated against current liabilities
            9. TIP: Remove aged receivables over e.g. 90 days that may not be collectible
      2. Cash flow ratios
         1. Days Sales in Accounts Receivable
            1. AR
            2. divided into
            3. Annual revenue
            4. multiplied by
            5. 365 days
            6. Advantage: General measurement of ability of organization to collect from payment offered on terms. Measurements of 25% more than standard could indicate potential cash flow problems
            7. TIP: If this method is used, consider performing a month to month analysis and notice any trends (seasonality, etc)
         2. Days Sales in Inventory (DSI)
            1. Average inventory
            2. divided into
            3. COGS
            4. multiplied by
            5. 365 days
            6. Advantage: General measurement of ability to convert inventory sales. A small number could indicate efficiency in selling inventory to meet cash flow needs
            7. TIP: If this method is used, consider that figures may be misleading because of 1/ selling off inventory at a discount, 2/ Chaning valuation methods, 3/ Miscalculations, or 4/ switching operation style (e.g. from distribution to manuf.)
         3. Days Payables Outstanding
            1. Calculate turnover ratio
            2. Ending AP
            3. minus
            4. Beginning AP
            5. divided into
            6. 2
            7. multiple by
            8. 365 days
            9. Advantage: Measures the number of days it takes a nonprofit to turnover its AP. A small number could indicate proper management of cash flow levels of meet AP requirements
   10. Use free cash flow analysis
       1. Calculate operating cash flow
          1. Net income
          2. plus
          3. Depreciation
          4. plus
          5. Amortization
       2. plus or minus
       3. Change in working capital
       4. minus
       5. Capital expenditures
       6. Advantages: Measures net change in cash generated by operation minus cash outlays for working capital and capital expenditure needs during a reporting period. Having free cash flow of substantial amounts could indicate a healthy financial condition.
          1. TIP: When using this method, consider expections to report period that reflect free cash flow. Some potentials of this result may be: selling off major assets, capital expenditure reductions, payment delays, accelerated AR due to discounts offered, staff reductions, or holding periodic pay increases