Searching for A Simple Way to Evaluate the Health of a Nonprofit

As a student, I was exposed to a good amount of research on nonprofit accounting and financial health. I was working at a nonprofit at the time, and I remember wishing there was a simpler, more accessible way to use publicly available information to evaluate the health of a nonprofit. There were (and still are) three reasons I thought/think this.

First, the basic idea of a nonprofit, that the public subsidizes these organizations through their tax-exempt status in exchange for the organization providing a public benefit, demands a mechanism by which to hold nonprofits accountable. And when I say accountable, I do not mean a data dump, but a way to make sense of the information that is out there. Second, persistent tracking of fiscal health indicators enables nonprofit managers to make better data-driven managerial decisions. Third, tracking fiscal data makes it easy for a nonprofit to legitimize itself to funders, customers, and policy makers.

Last year, at the behest of a student, I decided to take a crack at developing a nonprofit parallel to the International City/County Management Association’s (ICMA) Fiscal Trend Monitoring System. That system, which I teach in my public budgeting course, is a phenomenal way for public organizations to stay on top of, and report, their financial situation. It is pretty simple to use. You choose a municipality, use budget documents, census data, and other sources to track indicators over time, and then prepare policy statements based on the trends you observe. Here is an example of what the final document might look like.   For the nonprofit sector, the process, and end product, needs to look a little different. So how do I recommend doing this?

First, you pick a nonprofit. Easy enough. Second, you obtain the 990s of the nonprofit from Guidestar.org for as many years as possible. 990s are tax forms that, while ugly to look at, are full of useful information. The table below can be filled out using data from the 990s. Revenues, expenditures, operating position, and debt also appear in the ICMA system, though lobbying and public support is unique to the nonprofit sector.

2011 2012 2013 Change
Revenues
Contributions and Grants
Program Service Revenue
Investment Income
Total Revenue
Expenditures
Grants and similar amounts paid
Benefits paid
Salaries paid
Professional Fundraising Fees
Other expenses
Total Expenses
Operating Position
Revenue – Expenses
Assets
Liabilities
Net assets
Debt
Interest Payments
Lobbying
Lobbying
Public Support
Public Support Percentage

Next, you evaluate community needs by answering the following three questions (Note, the American Community Survey is a great tool for finding data about your community):

  • What are the community needs in the area served by this nonprofit?
  • Does the nonprofit’s mission match the needs of the community?
  • Is there reason to believe community needs have changed over the last 3 – 5 years?

These are not easy questions to answer, and require some research, but are the key to tying the 990 data to the needs of the community. Next, you evaluate:

  • Potential risks like competition, revenue restrictions etc.
  • The political culture of your community, i.e. is it supportive of your mission?
  • External economic conditions like unemployment (here census data is your friend).

Finally, and most important, you use all you have collected to determine how it connects to the organization’s mission. The two questions I favor are:

  • Does the organization’s spending reflect its mission?
  • Has the relationship of spending to mission changed over time?

Going through this process should do a few things. First, it should bring to light any obvious financial red flags. The more years of data you have, the more obvious these potential problems should be. Second, it forces a nonprofit to better understand the demographics and needs of the community it is serving. Third, and most practical, it forces a nonprofit manager to clearly connect hard data to its mission. This is something funders, policy makers, and others want, there is immense value to having it on hand.

I continue to tweak this and experiment with what indicators most closely predict future success. However, I continue to like this idea because it is simple, intuitive, free, and useful to managers and external audiences. I am also happy that other organizations and academics are pushing for more data-driven approaches to nonprofit management. It is so important for legitimizing and improving the performance of the nonprofit sector.

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