How We Assess an Organization’s Financial Health: A Step-by-Step Guide to Decoding the Numbers

Financial health is critical to understanding the overall health and sustainability of an organization and is a consistent consideration for any funder or nonprofit manager. But assessing financial health can be complicated, and effective methodology for doing so isn’t always codified or accessible. At the Skoll Foundation, we have streamlined and systematized our approach to this type of assessment into a financial analysis guide and are excited to share it more broadly with the philanthropic community.

I created this tool to help our Skoll team feel more comfortable reviewing the finances of our portfolio organizations and to ensure greater consistency in this analysis across the organization. For example, since financial health is a factor in our decision making, it’s important to ensure that we are all speaking the same language when it comes to an organization’s financial position. Lack of consistency diminishes an evidence-based approach to portfolio intelligence and decision making, and finance, much more so than programming or governance structures (especially for the diversity of organizations we support), lends itself to a more standardized analysis.

The Financial Analysis Guide is organized into five sections:

1.       Ratings Reference Guide: Snapshot guide for understanding the financial health of a nonprofit.

2.       Using Ratios and Indicators to Analyze Financial Health: Relevancy and calculations of ratios in the rating guide.

3.       Information Sources: Description of the main information sources for this analysis.

4.       Reviewing Audited or Unaudited Financial Statements: Guidance for reviewing financial statements.

5.       Reviewing the IRS 990 Form: Guidance for reviewing and navigating IRS 990 Forms.

By sharing this resource with the larger community, we hope to help decision makers navigate, understand, and effectively assess nonprofits’ financial health. For funders, this assessment can help guide funding decisions and areas of financial and managerial support to their grantees. For nonprofit managers, this assessment can help guide conversations with funders and clarify the relevant strengths and weakness of internal financial management.

Please feel free to reach out with any questions, or suggestions for refinements. Since we’re curious to know a bit about how this guide is proving to be useful, we’ve requested just a bit of information. We’re hopeful that you will find this resource as valuable as we have.