For a nonprofit organization to maintain its financial sustainability and achieve strategic goals in an efficient manner, specific accounting measures need to be undertaken to ensure the financial health of a nonprofit. Since most nonprofits, including ABC, arrange their performance in a manner that serves community needs and primarily depends on contributed and donated funds. It is in the interests of the nonprofit to ensure liquidity and efficiency of finances to utilize the funds to their fullest. The reviewed statements of financial position and statements of activities during the 2010 and 2009 fiscal year are analyzed and interpreted in this report. The report aims to identify the state of the financial health of ABC, detect problematic areas in terms of assets usage, and present possible solutions to those problems.
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Firstly, when analyzing the liquidity of the organization, it is necessary to determine liquidity ratios, such as the current ratio and quick ratio. Liquidity ratios demonstrate if the organization “has enough cash and other liquid resources to meet its obligations in the near term” (Finkler et al., 2017, p. 539). The current ratio for ABC in 2010(as calculated based on the data retrieved from the nonprofit’s statement of financial position) is current assets divided by current liabilities, which is 255,023/30,383=8.39, which is higher than the average of 2. The quick ratio for the nonprofit is calculated by adding cash, marketable securities, and account receivable and dividing it by current liabilities, which is 7.88 for the year 2010. This number is also significantly higher than the average of 2. Thus, the organization is positively characterized by a high level of liquidity, which, given the nature of the organization, means that a significant amount of funds might be insufficiently used. To eliminate this issue, the management should revise its prior financial statements, detect if this issue is an ongoing condition, and develop a strategy to utilize the assets to their fullest.
Another important measure of the organization’s financial stability is long-term solvency that indicates the ability of the company to meet its long-term financial goals. The profit margin ratio and debt to equity ratio are used to determine long-term solvency. These ratios demonstrate to what extent ABC’s “assets are funded with borrowed money” (Zietlow et al., 2011, p. 220). For ABC, the profit margin ratio in 2010 (total liabilities/total assets) is 0.12, and the debt to equity ratio for 2010 is 0.13. Since these indicators suffice the measure of 0.4, the ABC nonprofit performs sufficiently in terms of long-term solvency. However, when compared to the year 2009 ratios, the indicators are different. Indeed, the profit margin ratio in 2009 was 0. 44, and the debt to equity ratio was 0.77, which is higher than 0.4 and indicates that the company is not stable in managing its long-term financial obligations. It is advisable to restructure debt and increase profitability to eliminate such pitfalls in the future.
When analyzing the efficiency of ABC, assets to turnover ratio, and days receivable ratio is important. Using the indicators in the statement of financial position and statement of activities, the assets to turnover ratio is 3.32, which indicates a high level of generating revenue. As for the days receivable ratio, it reaches 27.4, which indicates that the company receives its revenue quickly; thus, it uses the funds efficiently. The analysis indicates that the company tends to accumulate extra revenue without using the funds, which contradicts the goals of the nonprofit. It is advisable to invest the revenue into the development of the company to facilitate its further growth and achieving strategic goals.
The flexibility of funds usage by the nonprofit and their sustainability are determined by its financial diversification. This indicator is calculated by specific ratios that allow for obtaining exact data as per asset specifications. Firstly, common line item ratio indicates the percentage of the contribution of a particular source of funds in the overall revenue of the organization. Corporate contributions ratio for ABC in 2010 is 0.24, special projects ratio is 0.001, seminars and workshops ratio is 0.02, subscriptions and publications ratio is 0.07. As for contributions ratio is 0.93, which indicates that 93 percent of all revenues come from corporate and individual contributions. To complete the diversification analysis, the program services expenses ratio is calculated to determine the level of expenses on programs; this ratio reached 0.86 for ABC in 2010. These ratios demonstrate that the nonprofit utilizes its contributions to implement program services that comply with the organization’s goals. However, the revenue sources are mostly limited to contributions that restrict diversification and endanger financial sustainability. The nonprofit should engage in the search for alternative revenue options.
Finally, the analysis of ABC’s profitability relies on the calculation of profit margin ratio and return on assets ratio. The profit margin ratio for ABC in 2010 reaches 11.6, which suffices the average indicator. The return on assets is 28.3, which is higher than average and means that the organization does not fully invest the profit into new endeavors. However, when comparing these indicators with those of 2009, the ratios are significantly lower, which indicates that the nonprofit did not generate surplus in 2009. It is advised for the nonprofit to maintain its current profitability level by raising funds and utilizing them efficiently.
Zietlow, J., Hankin, J. A., Seidner, A., & O’Brien, T. (2011). Financial management for nonprofit organizations: Policies and practices. John Wiley & Sons.
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Finkler, S. A., Smith, D. L., Calabrese, T. D., & Purtell, M. N. (2017). Financial management for public, health, and not-for-profit organizations. CQ Press.