Indicators of Nonprofit Financial Health (Tips for Reading a Form 990)

Change. Not Charity.

Understanding Nonprofit Financial Health: Tips for Reading a Form 990 Sarah Vaill

February 4, 2022

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What are some indicators that come to mind for Nonprofit Financial Health?

Lin k will b e p o s t e d in c h a t

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What are some indications of economic justice within an organization?

Lin k will b e p o s t e d in c h a t

The Six Principles of Trust

-Based Philanthropy

1. Give Multi -Year, General Operating Dollars (MYGOD ) 2. Do the Homework 3. Simplify and Streamline Paperwork 4. Be Transparent and Responsive 5. Solicit and Act on Feedback 6. Offer Support Beyond a Check https://www.trustbasedphilanthropy.org/

Trust -based Philanthropy and a Financial Health Lens ● Operate from a place of trust ○ Let go of control and perfection. ○ Use an equity lens as well: Dig deeper about what a financial health inequities in funding for BIPOC leaders ‘indicator’ may truly indicate, i.e. ○ Give first (start the relationship), evaluate after ○ When to assess financials: MYGOD!, bequests, large organizations ○ Which bottom line is more meaningful? LHF & radical accommodation. ● Practice being trustworthy (mutual transparency) ○ Be transparent about your knowledge, and learn from the organization ○ Are you giving toxic assets? Discuss the gift, also where it is needed most ● Get involved (not just as a donor) ○ Could you bring financial, legal, property expertise to a Board or committee? ○ Invite others to join you in supporting these organizations

What Is the IRS Form 990? ●

IRS Form 990 is a nonprofit’s annual tax return

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IRS revised the form to share more of the story of an organization: mission, financials, key programs, employment policies, leadership, compliance, types of revenue, contributors, and lobbying

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Remember: ○ The most recent Form 990 available for an organization is typically 1 -2 years in the past. It’s due to the IRS 6 or 11 months after the close of the org’s tax year. ○ Review it for a snapshot of where the organization has been ○ Form specific questions you may still have about where they are today ○ Fiscal sponsorship: only the sponsor’s 990 will be available ○ Indicators of financial health can reflect the blindspots or inequities of philanthropy

InnerCity Struggle 2018 Form 990

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Four Financial Health Indicators 1)

LUNA (Liquid Unrestricted Net Assets) - (see Page 11, Part X, Balance Sheet, Line 27) The change in LUNA over 2 -3 years can show how the organization is: a) maintaining fundraising from individuals and grants for operating support b) building its reserves

Reserves: technically, the surplus of unrestricted net assets over time, providing stability to absorb the ups and downs of funding without having to cut programs 1)

Temporarily restricted net assets (see Page 11, Part X, Balance Sheet, line 28) a) When compared to total expenses, this can help us understand funds secured for future programs or time periods b) Indicates ability to maintain current expenses into the future c) Change over 2 -3 years shows trends mainly in their foundation fundraising

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Program service ratio ratio

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Revenue reliability (growth over 5 years) see Schedule A, Part II, Support Schedule public support totals; also see LUNA in consecutive 990s

: Divide the total of program service expenses by total expenses for this , for 5 years of

Calculating the Four Indicators 1. LUNA (see Page 11, Part X, Balance Sheet, Line 27) a.

Divide the unrestricted net assets by the Average Monthly Expenses to get a sense of the number of Months of Reserves

1. Temporarily Restricted Net Assets a.

(see Page 11, Part X, Balance Sheet, line 28 Divide the restricted net assets by the Average Monthly Expenses to get a sense of the Number of Months of Funds for the Future

1. Program Service Ratio

(see Page 10 , Part IX, Statement of Functional Expenses, line 25,

column A vs column B a. Divide the total of program service expenses (Line 25, Column B) by total expenses (Line 25, Column A) for this ratio

1. Revenue reliability

: Check the organization’s track record of bringing in recurring dollars on an unrestricted operating basis year after year (see Schedule A, Part II, Support Schedule , for 5 years of public support totals; also see LUNA in consecutive 990s

See these indicators and others in a comparison of organizations prepared for a DAF holder (Excel sheet)

Questions?

Reach out to Dora Quach, Senior Grants Manager, dquach@libertyhill.org Justin Suarez, Grants Associate, jsuarez@libertyhill.org