Financial Healthcheck

With the pandemic over and the additional funding related to the pandemic ending, now is a good time to review the financial health of your organization. While the audit does provide you with some insights to your organization’s financial condition, it is also important to consider the following items on an ongoing basis.

Financial Condition and Results

During each year’s audit, the auditor considers an array of factors and information to plan the audit and determine areas of audit emphasis including, among other things, key performance indicators and a consideration of conditions that, in the aggregate, could raise substantial doubt about an organization’s ability to continue as a going concern. The same factors and information are helpful tools for you to assess your organization’s financial health. A good starting point is an evaluation of the subsequent year’s operational and overall budgets, as well as a long-term capital budget. Overall, this assessment should also include a more encompassing review of information demonstrating the organization’s financial sustainability, such as:    

• Cash flow projections: Cash is the lifeblood of an organization’s operations and therefore, a cash flow problem is a leading indicator of other financial and business issues. Cash projections should reflect the use of endowment funds and the liquidity and availability of the organization’s financial assets. Management should also monitor financial covenants related to outstanding debt.
• Financial trends: Trend analysis of your financial position and operations will help you predict what will happen or help you better understand what is currently happening. Trend analysis can provide information across many areas, which may also identify areas for improvement.
• Financial ratios: Financial ratios measure the relative financial health of an organization based on commonly used financial indicators. These ratios may include the current ratio, debt to net assets ratio, fundraising effectiveness ratio and administrative expenses as a percentage to total expenses. Donors and other financial statement users can use these ratios to determine which organizations are not financially responsible. In addition to calculating the ratios based on the year end audited results, organizations should be projecting these calculations on a regular basis and considering any downward trends throughout the year.
• Internal and external matters: Matters of nonfinancial activity, such as staffing and litigation, which may pose negative consequences on the future financial position of an organization should be reviewed.

Action: Management should be implementing and/or monitoring ongoing reviews of key performance indicators, including those identified above. For the annual audit, this information should be summarized and provided to your auditor to support your assertion that your organization is a going concern. In addition, these ratios and trends can be used as discussion points with donors and members of the finance committee on the financial health and stability of your organization, as well as assist you in effectively managing your organization’s resources.

For assistance in developing key performance indicators and tools to assess your financial health, please reach out to CohnReznick and we would be happy to consult with you on this topic.