Now, let’s delve into the analysis of the Statement of Activities, also known as the Income Statement. This financial statement quantifies the impact of the company’s revenues and expenses, presenting users with the total change in net assets over a specified period, typically one month, quarter, or one year.
How to create an Income Statement
Initiate the analysis by scrutinizing revenue.
This examination can unveil trends in income sources, including donations, membership dues, investment returns, grants, and contracts. It also provides insights into the breakdown of restricted versus unrestricted revenue. Start by calculating the reliance ratio, determined by the largest type of revenue divided by total revenue. This ratio offers valuable insights into the awareness of the risk associated with a major reduction in revenue if this particular type is diminished or halted. Consider calculating this ratio for each major type of revenue.
Fundraising ROI (return on investment)
For organizations involved in fundraising, calculate the Fundraising ROI (return on investment). This metric measures the revenue generated per dollar spent on fundraising. The formula is Total Fundraising Costs divided by Total revenue raised by fundraising. The same analysis could be applied to the business development costs if necessary.
Analyzing Expenses
Then begin analyzing expenses. Nonprofit watchdog agencies and funders closely examine the percentage of program expenses relative to total expenses. While there’s no definitive answer regarding the acceptable amount of money to be spent on administrative and fundraising expenses, the best practice is to keep these costs under 20 percent of total expenses. Calculate the support service ratio by dividing Fundraising and Administrative Costs by Total expenses.
Personnel Costs ratio
Additionally, use the Statement of Activities or Statement of Functional Expenses to calculate the Personnel Costs ratio and Fringe Benefits Cost ratio. Personnel costs, being a significant part of the budget, may not be easily reducible and should be carefully monitored. Fringe benefits, although part of personnel costs, are influenced by external factors and may increase at a different pace than other costs. The personnel cost ratio is calculated as Total Salaries and Fringe Benefits divided by Total Expenses, while the Fringe Benefits ratio is Total Fringe Benefits Costs divided by Total Salaries.
Identify changes and trends
Review the Statement of Activities and Statement of Functional Expenses to identify changes and trend developments in large items compared to prior periods. Lastly, assess net income and losses. While many non-profit organizations receive grants and funding for specific programs without profit expectations, it’s crucial to ensure full cost recovery and that organizational net assets and reserves are not depleted, maintaining sustainability in achieving organizational goals. Calculate the Net operating margin by dividing Net Income by Total Revenue and analyze trends in changes of organizational net assets and reserves.
Review Cash Flows
Lastly, conduct a comprehensive review of the Statement of Cash Flows to garner additional insights into the organization’s operations. This examination enables the identification of liquidity risks that require effective management.
Our next blog, Statement of Financial Position Analysis, will conclude our three-part series on deciphering key financial documents. We hope you’ve enjoyed the series so far. Share your thoughts on our LinkedIn page: https://www.linkedin.com/company/97025878/
~Imran Babayev, CPA
The Consonance Group provides expert level financial management for small non-profits and for-profit organizations. Please reach out to Jonathan at jonathan@consonance.group.