FINANCIAL SUSTAINABILITY ANALYSIS
There are three major factors related to the financial sustainability of a nonprofit organization (Box 1.1):
1. Inherent factors
2. Collateral factors
3. Environmental factors
The inherent factors are directly linked to financial sustainability. They determine whether an organization is financially sustainable or not. Inherent factors of financial sustainability include, but are not limited to, financial management, budget, financial statement analysis, a financial sustainability plan, social enterprise, fund-raising, grant seeking, investment, and risk management.
Collateral factors are indirectly related to financial sustainability and include governance, leadership, strategic planning, human resources, needs assessment, asset mapping, community relations, services delivery, technology, program evaluation, social marketing, and organizational transformation.
The environmental factors are social, economic, and political (SEP) issues that may affect funding, support, operations, or even the survival of a nonprofit organization.
Box 11.1 Financial Sustainability Analysis
- Financial management
- Financial statement analysis
- Financial sustainability plan
- Social enterprise
- Grant seeking
- Risk management
- Strategic planning
- Human resources
- Needs assessment
- Asset mapping
- Community relations
- Services delivery
- Program evaluation
- Social marketing
- Organizational transformation
Overall, financial sustainability analysis involves a thorough assessment of the internal strengths and capacity building of an organization, its ability to develop community relations that include strategic partnership, and its potential to overcome challenges from its internal and external environment and adapt to changing conditions.
FINANCIAL RATIOS ANALYSIS
Financial ratios analysis is based on the analysis of the financial statement. The financial statement analysis focuses primarily, but not exclusively, on profitability and growth, liquidity, solvency, and efficiency and effectiveness.
- Profitability is the surplus of revenue over the expenses. The gross profit margin, the net profit margin, return on assets, and return on equity are examples of tools used to measure the profitability of a nonprofit organization.
- Financial growth is the measure of the percentage of increase in the financial operations of an organization in comparison to previous periods.
- Liquidity is the ability to meet cash requirements. Simply put, it is the ability to pay the bills. The current ratio, acid test, acid test ratio, inventory turnover, and average collection period are example of instruments used to measure liquidity.
- Solvency is the ability to pay off all debts if the organization were dissolved tomorrow. Debt ratio and debt-to-equity ratio are examples of tools used to measure solvency.
- Efficiency is the ability of an organization to deliver the maximum service possible with the lowest amount of human, material, and financial resources.
- Effectiveness measures the extent to which an organization uses its resources adequately to fulfill its mission and vision.
STRATEGIC GOALS AND OBJECTIVES
The strategic goals and objectives constitute the translation of the purpose of a financial sustainability plan in terms that are measurable. Strategic goals are long-term-oriented and are linked to strategic outcomes, such as profitability, liquidity, solvency, efficiency, or effectiveness rates, over a period of time in the future. Strategic objectives are midterm and short-term oriented, and are linked to shorter outcomes to be obtained in order to reach a long-term goal. The definition of strategic goals and objectives can be inspired from the indicators of financial sustainability listed in Box 11.2. Examples of goals and objectives for a financial sustainability plan are provided in Box 11.3.
Box 11.2: Indicators of Financial Sustainability
- Culture of strategic planning and performance measurement
- Culture of stewardship and accountability
- In-house-generated income is diverse and greater than public funding.
- Sustained high profitability (growth)
- Sustained increase in solvency
- Sustained increase in liquidity
- Rainy-day fund is at least equal to the equivalent of a 1 -year budget for core expenses.
-Level of staff satisfaction and commitment are equal to or greater than 90%.
- Level of program efficiency is equal to or greater than 90%.
- Effective risk management policy
Box 11.3 Examples of Goals and Objectives
Goal: Increase ratios of profitability, solvency, liquidity, efficiency, effectiveness, and employee satisfaction and commitment by 50% within the next 10 years. Examples of objectives could be:
Develop a framework for diversifying the funding sources of the organization, and outline financial resource allocation strategies that ensure the ability to provide quality activities, projects, programs, or services overtime.
Develop a framework for financial resource allocation strategies that support the strategic goals and objectives of the organization.
Open a contingency fund representing 1 % of the total organizational budget that will enable the organization to overcome unforeseen times of financial hardship.
Develop action steps to gradually and significantly reduce the dependency of core programmatic activities on grant funding.
Develop and implement action plans to diversify the funding portfolio of the organization by shifting the focus on fund-raising though earned-income strategies.
Implement continuing quality improvement strategies regarding the financial sustainability of the organization.
For example, if a nonprofit organization set a goal to increase revenue from fund-raising by 50% over the next 5 years, the objectives could be to (a) organize fund-raising events that will account for an increase of 20% in revenue by year 2, (b) organize a capital campaign to upgrade corporate donations that will account for an increase of 30% in revenue by year 3, and other specific short-term targets. The attainment of all the objectives will help achieve the goal.