Your Nonprofit May Be too Fat
By Tom McLaughlin
Its not about overweight CFOs or chocoholic executives. The focus is on the far richer and more common imbalances in your balance sheet. Hopefully these imbalances are in your favor. If theyre not, youll understand why not.
Carrying out various calculations based on the IRS 990 should give you some perspective. Okay, words like pleasure and financial reports dont fit well together either.
Pull out your most recent Form 990, which is the functional IRS equivalent of a corporate tax return. On Page 1, look at line #5. This is where you (or your predecessor) filled in the box revealing that your organization employed X number of people during that recently completed year. Remember that in all likelihood the number of employees is largerpossibly much largerthan the actual week-to-week employment numbers. This is due to illnesses, unexpected resignations, etc.
Now slide down the page to line #12 directly under Current Year to find your Total Revenue. Move down in the same column to line #18, or Total Expenses. You can either do the math or just look below the total expenses block to line #19 which will allow you to conclude that you enjoyed a profit -- or sustained a loss.
In the upper left hand corner is the term Balance Sheet, which is accountants terminology for the one piece of paper that shows many fiscal developments during the past year. The page 11 sheet can tell you the amount of assets your organization has accumulated, which are balanced by the total number of liabilities plus net assets.
A smart CFO will keep a running (and ever-changing) version of the balance sheet, and most of the rest of the organization will never know the importance of that information. For instance, line #19 gives the reader revenue and expenses for the current year and the preceding one. This line should produce a positive number. If the numbers in line #19 are both negative, it means that your organization lost money in both of the past two years. A single yearly loss or two is not usually cause for deep concern but several losing years in a row might be.
The balance sheet, which can be found on page 11, is perhaps the single most powerful communication tool that financial folks use on a regular, even daily, basis.
The Balance Sheet
A balance sheet makes it easy to sum up various categories. The Total Assets category is just what it sounds like 15 lines of various kinds of assets. The Liabilities category is smaller (nine categories) plus the Sum of Liabilities. The third category is called Net Assets (or Fund Balances). Since most of this group relates to certain types of net assets plus things such as retained earnings, this is the scorecard. Hint: Well-run organizations will always have more assets and fund balances than liabilities.
Here are some ways you and your team can gauge the effect of your financial practices. To make this a bit easier we will continue to refer to the items on an actual blank IRS Form 990. One of the most helpful calculations you can make derives from page 10, columns C and D. Go to line #25 on page 10 and do a simple calculation. Add the expenses listed in columns C and D (on the far right). Next, divide the sum of columns C and D by line #25 under the A column showing total expenses. The percentage that results can be mystifying without more background material, but the percentage itself can be telling. To the extent that there is any universal interpretation of the percentage, management costs in Column C row #25 should be 10% or less. Note that fundraising expenses typically are often well under 10% for many similar nonprofits.