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Apr 24, 2012

New Nonprofit Tool Allows for Easier Evaluation of Financial Health

Evaluating the financial health of nonprofits has always been unnecessarily difficult. Recent changes in accounting rules have added confusion and hindered easy interpretation of financial condition. Many of the conventional metrics in for-profit financial analysis do not apply to nonprofits. With so much concern for emphasizing their programmatic uniqueness, too many nonprofits overcomplicate financial dashboards.  These dashboards end up getting turned into lengthy documents, negating their entire purpose of simplification.

The primary tool to evaluate and compare nonprofits has, until now, been the IRS Form 990 reports. Using information from these is difficult, requiring one to download individual annual reports, manually extract the needed detail, and then compile it into an historical series or comparison across nonprofits. The difficulty has discouraged effective use of this information.  

To address this inefficiency, a new tool has been designed through the collaboration of GuideStar and Nonprofit Finance Fund which creates an automatic, standardized report on nonprofit financial health. GuideStar is a national nonprofit that provides all IRS Form 990 filings on the internet, free of charge. Nonprofit Finance Fund is a well-regarded community development financial institution (CDFI), long regarded as a thought-leader in the area of nonprofit financial health.  

Their new tool, Financial ScanSM, draws data directly from GuideStar’s IRS Form 990 database and compiles the information into an easy-to-read, graphical format. A subscription for a nonprofit to run a single report on itself is only $250. The creators hope that this report will become an industry standard for interpreting nonprofit financial data.

Living up to its own claim, this new tool “demystifies nonprofit finance, helping you understand how and what financial data to measure.” Comparing an organization’s situation with up to five others, Financial ScanSM will help you “plan for the future, communicate resource needs, and make better decisions.” This simple report is one of the most effective tools I have seen, as it lays out the full range of strategic issues that impact reliability. Every nonprofit board should certainly consider using this tool.

I have written extensively on critical issues like these that can allow nonprofits to be reliable providers of community needs. Consider reading my book, Linking Mission to Money: Finance for Nonprofit Leaders, to learn about more tools that your nonprofit can put to use in order to provide more effectively for the community.