Expert Q & A: How can grantmakers best read and analyze nonprofit financial statements?

By: Chad Gorski, Senior Internal Auditor at Howard Hughes Medical Institute

  1. Understand the goal of the statement analysis and consider the risk assessment needs of your organization: What part of the required due diligence process does it fulfill? How much risk is acceptable? What red flags will impact decision-making? Is a ground-up analysis necessary or can third party info be used? See Project Streamline’s guide on Grant Budgets and Financial Reports, which helps grantmakers think through what information is really needed to make a grant. The Due Diligence Done Well guide from Grantmakers for Effective Organizations is also very useful.
  2. Understand the accounting principles of double-entry bookkeeping, the nonprofit accounting equation (Assets = Liabilities + Net Assets), cash vs. accrual accounting, and the purpose of and relationships between the four basic nonprofit financial statements and the IRS Form 990. See: Glossary of financial terms from the Nonprofit Finance Fund (NFF) and other resources at the Free Management Library and the Khan Academy.
  3. Review learning resources or attend training sessions on financial statement analysis that cover topics such as cash-flows, financial ratios, and the auditor’s opinion letter. Examples include: the GM101 workshop held by PEAK Grantmaking or coursework on financial analysis at the Johnson Center for Philanthropy’s The Grantmaking School. Financial ratios, such as those available in this analysis tool from Propel Nonprofits, can indicate an organization’s overall financial health. But be cautious of over-reliance on certain ratios, as explained in this posting by Guidestar. Finally, look at Charity Navigator, Guidestar, or the Financial SCAN tool from NFF to learn about more systematic methods of analyzing nonprofit financial health.
  4. Reach out to others that fund similar types of nonprofits to learn about their workflows, analytical tools, and other resources and expertise. Join PEAK Grantmaking or one of the Regional Associations of Grantmakers to network with peers online and in-person. National and local CPA firms may also provide useful resources.
  5. Practice, reflect, and adjust goals for future learning opportunities such as further streamlining the due diligence processes or analysis of project budgets and annual grantee reports.

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Chad Gorski



Financial Stewardship
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