Nonprofit Finance Fund (NFF) has long held that nonprofit organizations are more than just the sum of their programs, and more than their overhead ratios. Existing nonprofit ratings platforms are simply inadequate to the complex task of analyzing and deriving insights from nonprofit financial data. They do not help nonprofit organizations communicate their financial story and goals to staff, board members and funders. They fail to provide a holistic picture of an organization’s business model and balance sheet.
Currently available tools can lead to premature or misinformed fund-no fund decisions, rather than a more enlightened grantmaker-grantee dialogue about what organizations need to survive and thrive. They risk turning nonprofit financial analysis into an exercise in compliance rather than a tool to advance organizational effectiveness.
If we’re honest with ourselves and really care about long-term effectiveness, we need to conduct the kind of comprehensive financial analysis that looks at the entire nonprofit enterprise. We need a more nuanced understanding not only of costs but also of revenue reliability, profitability, balance sheet health and liquidity. We need to look beyond numbers and ask probing questions about what kinds and amounts of resources are required in the context of an organization’s strategy, marketplace and lifecycle. These questions might include:
Which key revenue streams are relatively reliable and which are at risk?
Is the organization covering its full costs and generating regular surpluses?
If not, are expenses adjusted in line with changes in revenue?
Does the organization have adequate access to cash to manage its cash flow cycles?
Are facilities and other fixed assets maintained as they depreciate?
Is the organization’s board prioritizing saving for the long term and setting aside surplus cash into reserve?
Answering these questions takes time and requires sophisticated analysis skills. Fortunately, help is at hand. NFF has been working with GuideStar for more than a year to create a new data platform for nonprofit financial analysis and education. Financial SCAN (Situation & Comparables ANalysis) provides instant financial information on 280,000 nonprofits across the country.
Derived from Form 990 data filed with the IRS, Financial SCAN shows up to five years of financials for a nonprofit. Dashboards and graphs reveal ratios that are much more relevant to organizational health and stability, such as: profitability margins, estimated full costs, depreciation of fixed assets and months of liquidity. The platform allows you to compare the financials of multiple peer organizations to better understand trends across a sector. We’ve also incorporated an educational guide to help users make sense of the data and understand its implications.
By bringing transparency and comparability to financial information in the sector, Financial SCAN can provoke more informed, less judgmental and increasingly honest dialogue among nonprofits, their funders and advisors about what organizations really need to be stable and effective. We encourage you to learn more about Financial SCAN and how it can be helpful to you.
Pam: So Rebecca, tell me more about the problem that you are trying to solve – what is unique about this tool and how can it help nonprofits and foundations and professionals?
Lee Glenn, SVP of GuideStar, and Rebecca Thomas, VP of Nonprofit Finance Fund, discuss Financial SCAN
Rebecca Thomas, Nonprofit Finance Fund: NFF and GuideStar came together to really create a new financial health analysis standard for the nonprofit sector. Right now, there really is no industry-wide standard. Nonprofits are asked to create lots of reports, myriad data points for funders, reporters, advisors, and that really detracts from what they do best which is delivering a great program. Meanwhile, nonprofit funders and advisors score through all this data but really lack a shared understanding of what to look for and why it matters. The upshot is that no productive dialogue takes place between the parties about what it takes to run and maintain a healthy nonprofit organization. It’s not all that different from the challenges that we all face when we sit around the dining room table and talk about our finances – we don’t agree on basic financial terms and why they matter, we can’t have a good conversation about how we’re spending our money, how we’re saving for a rainy day and what kind of liquidity we need to pursue our future goals.
Pam: That sounds like a very interesting challenge to tackle. So Lee, can you tell me a little bit more about how specifically Financial SCAN will help me? How’s it work?
Lee Glenn, GuideStar: Financial SCAN is an online tool, it’s really easy to use, just like using TurboTax, so virtually everybody will have access to it and be able to use it and understand it. There’s something in it for everyone, no matter which position you are approaching the tool from: you can be a funder, advisor, or nonprofit, and it has some sort of information in there that will be interesting to you. We use a series of dashboards and metrics for at-a-glance analysis. We use graphic representations and educational content for a deeper dive and we also use peer comparisons so you can understand how your organization fits into a group of organizations of your choosing. It’s our hope that Financial SCAN will be used by decision makers in the nonprofit space to be consulted before they make any key decisions or start any big projects. Financial SCAN is a very cost effective way to get this insight. We know that cost is issue for nonprofits, so we developed a program for nonprofits to have temporary access a couple times a year.
Pam: That’s great. Rebecca, as a funder, donor or advisor, will this tool tell me where I should give? If I’m a nonprofit, do I need to be concerned the SCAN might rank me against my peers?
Rebecca: Nonprofits definitely don’t need to be concerned. Financial SCAN is really not about passing judgments on the relative merits of individual organizations. NFF really believes that the existing ratings and rankings platforms are inadequate for some of the complex decision-making that goes into deciding whether to support an organization and how to support that organization. Another thing I want to point is that Financial SCAN is really about a comprehensive analysis of an organization. We don’t focus on just a few limited metrics of organizational health like the overhead ratio – that’s one example of a metric that is commonly held up. Yet, in NFF’s experience, it really has no bearing on an organization’s stability or effectiveness in delivering in its mission.
Pam: So, informed conversations, no arbitrary metrics like overhead ratios – that is a noble goal, no doubt. I hope you don’t work yourselves out of a job in the process.
Rebecca: I hope we don’t either! But, in all seriousness, more analysis will have to be done. There is always more learning that all of us can do. But Lee and I are so excited to bring together all the stakeholders, involved in making social impact, to have a real candid conversation about it takes to effectively resource an organization, and what the relationship is between financial health and nonprofit effectiveness.
Pam: Wonderful. Well, thanks for your time guys, and good luck. And if you’d like more information, please click to http://www.guidestar.org/.
“The bomb buried in
Obamacare explodes today,” Rick Ungar declares in a December 2ndForbes blog post describing a
regulatory provision in the Affordable Care Act:
"[T]he medical
loss ratio...requires health insurance companies to spend 80% of the consumers’
premium dollars they collect—85% for large group insurers—on actual medical
care rather than overhead, marketing expenses and profit. Failure on the part
of insurers to meet this requirement will result in the insurers having to send
their customers a rebate check representing the amount in which they underspend
on actual medical care."
If this regulation is
indeed a bomb, then nonprofit administrators must now be totally shell-shocked
from navigating the demands of donors, institutional funders, government
agencies charity rating agencies, consultants and even board members who want similar
oversight of the ratio between program and administrative or fundraising
expenditures and then use that data to make claims about operational efficiency.
The fact that this
kind of ratio system is now being applied prominently to a for-profit industry gives
us an opportunity to highlight the way similar measures have served as a
minefield in the nonprofit sector for years.
The differences
between nonprofits and insurance giants are more striking than the
similarities. As for-profit entities, insurance companies’ customers are
expected to pay a market rate for their services, these funds are always
unrestricted, annual surpluses are encouraged rather than stigmatized, and
financial gain is the primary motivator.
None of these apply broadly to nonprofits.
Presumably as a
matter of public policy, the medical loss ratio is being applied to insurance
companies because those companies might otherwise spend even more on lavish
executive salaries, luxurious offices, and so on. But, in an environment where nonprofits face
restricted grants and overall scarcity of funds, not to mention baseline commitment
to mission, what would be the equivalent goal for imposing such ratios on the
nonprofit sector? Are such measures
likely to be successful in inducing “operational efficiency?”
In posts following up
on Ungar’s initial article, Sarah Kliff (on the Washingon
Post’s site) and Ungar raise the issue of how
the government will define which expenses qualify as direct medical care, which
will be administrative expenses, and which expenses could be left out of the
equation altogether. Many of these
particulars seem to be addressed up front in the legislation, though one
assumes that the financial staff of insurance companies will ultimately find
room for interpretation.
For the nonprofit
sector, too, that room for interpretation is significant.
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