How can Your NFP’s Financial Information Impress Investors?
posted Oct 6, 2016 by Sandy Ross, CPA, CFE in the Mission Matters Blog
Your nonprofit organization’s financial information has the potential to cast a great first impression on prospective investors. There are some key things to keep in mind as you “prep” your organization’s finances for investors.
What does a potential investor need to evaluate my organization?
Investors, potential funders and donors generally need two pieces of information to make an educated decision regarding your nonprofit organization. These are:
- Your most recent audit or financial statements
- Your most recently filed Form 990
Three Important Ratios
- Program spending ratio - This is one of the most common benchmarking measurements that will be of interest to potential donors. It is calculated by dividing program expenses by total expenses. This results in a value that reflects the portion of your organization’s funds spent on program services. You want a higher percentage and anything below 75% may raise questions.
- Fundraising efficiency ratio - This is another frequently used ratio for potential donors and reflects how much it costs for your organization to raise each contribution dollar. For this ratio, you take total fundraising expense and divide it by “contribution and grant revenue” (revenues received as a direct result of your organization’s fundraising efforts). The lower percentage the better, however, anything above 35% is not considered favorable.
- Management expense ratio - This reflects the portion of expenditures spent to fund your nonprofit’s management and general functions. This value is calculated by dividing total management and general expenses by the total expenses. A result of 15% or less is a good range to aim for in this area. If your fundraising and management and general expenses are above 35% of the total expenses this is generally a red flag for funders.
Any other financial factors to pay attention to?
Some other things investors might want to see:
Accumulation of unrestricted net assets - Investors will pay attention to your unrestricted net assets — The Better Business Bureau suggests that an organization’s unrestricted net assets should not be more than three times the size of its past year’s expenses, however, an excess is always better than a deficit.
Trend analysis – Investors may review the three most recent years of financial information to see if there is an increasing or decreasing trend in revenue and expenses. Investors will note that your organization might be unable to sustain itself going forward if this analysis results in accumulating losses.
Information is available electronically for investors, funders, donors and Charity Watch Dog Agencies to review and analyze. Be sure to manage the message your finances are sending in a way that addresses the concerns of potential donors and shows them that your organization is financially stable and mission focused. Questions?Contact Our Not-for-Profit Services Team today.