Financial analysis of a non-profit organization: A Child’s Hope International Inc

Just like the for profit organizations, nonprofit organizations (NPOs) also have books of account albeit different. To make sense of the numbers, identifying the organization’s strengths and weaknesses, one must conduct a financial analysis. This is done using various ratios which will help identify financial anomalies and help train the organization’s focus on what is important. Given that different non-profit organizations have different objectives coined within their mission statement, financial analysis of the same is conducted in relation to the organization’s mission? This is so since the organization’s mission is the sole reason for its existence, and all resources are allocated to satisfy the mission of the organizations objective (Turk et al. 1995). Through an analysis of financial performance of a non-profit organization in relation to its objective or mission, this essay is going to conduct financial analysis of ‘A Child’s Hope International Inc’ for the period of 2012 and 2013

Overall overview of NPO’s financial statement

The financial statements of the non-profit organization are built on the accounting equation, Assets = Liabilities + Net Assets, to establish the financial position of the organization. Since this balance sheet equation does not provide any additional information on how the assets, liabilities or net assets changed over time, a non-profit organization has to provide a statement of activity or to highlight the changes. As such, to measure or examine how an organization spent it resources, a nonprofit organization has to prepare a statement of functional expenses which shows how expenses were distributed across the period in question (Keating & Frumkin, 2008). This is established from the formula; Total Expenses = Program Expenses + Fundraising Expenses + Administrative Expenses. Another key note is that revenue causes an increase in the net assets of the organization while expenses reduce the net assets of a nonprofit organization hence the income statement formula of Revenues – Expenses = Change in Net Assets. 

A statement of revenues, expenses and change in a net asset of a nonprofit organization, ‘A Child’s Hope International Inc,' for the year 2012 and 2013 is shown below. This statement was adopted from the form 990 of tax return 2013. 

A Child’s Hope International Inc

Mission: To motivate and mobilize the church and community to care for the orphan and vulnerable children. 

Statement of Activities for 2012 and 2013

	2012	2013
Revenues
Contribution from grant Investment income Other revenue	884688 214 9491	903575 2821 15904
Total revenue	894393	922300
Expenses
Grant and similar amount paid Salaries and other compensations Other expenses	371679 161647 182208	529057 168342 181369
Total expenses	715534	878768
Revenue less Expenses	178859	43532
Net Assets or Fund balance	Beginning of current year	End of the year
Total assets	685082	729775
Total liabilities	0	13518
Net Assets or Fund balance	685082	716257

Adapted from A child’s Hope International Inc Form 990 Tax returns and Retrieved from http://thechildrenarewaiting.org/wp-content/uploads/2014/07/2013-990-SHORT.pdf

A Child’s Hope International Inc Financial Position

The above statement provides us with information on revenues and expenses which will be crucial in predicting future activities. From the statement, we are able to establish that the NPO closed the year in a good financial position. Its biggest source of revenue is a contribution from grant and is recorded as the full amount the organization expects to receive. Within this period in question revenue from grants increased by $18887 a 2.31% increase though the growth margin is low compared to the 16.51 % growth in revenue registered by Family Connection Inc a similar organization in the industry. Although this trend is desired, it’s difficult to predict its future as it is revenues coming from donors, an unpredictable source. Income from the organization’s investment also increased between 2012 and 2013 by more 2607 (more than 100% increase). This is a very a very important variable under the direct control of the organization and as such more focus should be placed on it to enhance its growth. From the margin of increase reported in the period, we can predict that revenue from investment income will keep growing or will be maintained at a high level as of that of 2013. Revenues from other sources also increased by $6413 from $9491 in 2012to $15904 in 2013. In 2013 money spent to support the orphans and vulnerable children, grants and the similar amount paid, increased from $371,679 to $529057 marking a 42.34% while expenses on salaries and compensations increased by a margin of 4.14% between the two years. Looking at Child’s Hope expenses, the organization’s expense has been rising in line with their objective of helping children. Change in a net asset in 2012 was $178859 which decreased by 77.9% in 2013 to close at 43532. This change was contributed by the increase in expenses at a greater margin than the increase in revenues. In 2012, the organization met all their obligations closing the year with a zero liability balance but in 2013 the closed the year with outstanding debts of 13518 i.e. liabilities. The organization’s net asset balance increased $31175 in 2013 up from $685082 in 2012. This was a 4.6% increase, another important variable which shows the direction of asset development of the organization. 

Below is the financial statement of Family Connect Inc., another NPO, whose mission is almost similar to Child’s Hope Inc., and provides us with a good basis or analyzing the relative financial performance of Child’s Hope Inc.

Family Connection Inc

Mission: To partner with our communities by providing caring services to hurting children, youth, and families, in helping them reach wholeness of body, mind, and soul.

Statement of Activities for 2012 and 2013

	2012	2013
Revenues
Contribution from grant Investment income Other revenue	3655232 (15497) 16212	4258879 47459 25788
Total revenue	3655947	4332123
Expenses
Grant and similar amount paid Salaries and other compensations Other expenses	0 2280404 1389016	0 2518188 1510337
Total expenses	3669465	4028525
Revenue less Expenses	(13518)	303601
Net Assets or Fund balance	Beginning of current year	End of the year
Total assets	2618634	3309887
Total liabilities	200491	588143
Net Assets or Fund balance	2418143	2721744

Adapted from Family Connection Inc Form 990 Tax returns and Retrieved from http://990s.foundationcenter.org/990_pdf_archive/351/351870499/351870499_201407_990.pdf

Are financial resources sufficient to support the mission? 

From the balance sheet, it is evident that organization is in a strong financial position to sustain its mission of supporting the orphaned and the vulnerable children. Its net operating balances of $685082 in 2012 and $716257 in 2013, is a good indication that the organization is operating within its means. However, despite the seemingly strong financial position, the organization’s ability to support its mission has declined in 2013 compared to 2012. This can be proved by two ratios, the primary reserve ratio which shows how long an organization can continue operating using its current assets before turning to income from operating activities and net income ratio which measure the performance of core activities. The organization’s primary reserve ratio decreased from 3.83 in 2012 to 0.81 in 2013. Though the ratio is positive showing how long the organization can depend on its current assets without relying on a surplus generated by operating activities, the decline signifies an increase in expenses which if not checked could affect the organization capacity of depending on itself to sustain its mission. Net income ratio also decreased from 0.20 to 0.047. Comparing the Child’s Hope performance to Family Connect, in 2013, Family Connect reported a net income ratio of 0.7 closely related to Child’s Hope showing that the cause of the increase in expense was universal not limited to Child’s Hope only.

Financial Resources Available To Support the Mission 

It is imperative for nonprofit organizations to be cautious of those operations or investment strategies which end up drawing a lot of money or rather divert resources from core objective, the mission (Abraham, 2004). The way an organization uses its debt to support its goal and generate internal plus external revenue is addressed when considering the financial resources available to support a mission. It is important for an organization to ensure that its assets develop since this is what will generate the revenue streams capable of supporting the mission. From this argument, the Child’s Hope assets have developed has increased within 2013 painting a good picture of financial resources being available to support the mission. Another thing of note is that Child’s Hope Inc does not so much depend on of debt judging from the low level of liability the organization has compared to Family Connection Inc. in 2012, Child’s Hope had zero liability hence had zero debt burden ratio and zero debt coverage ratio. All these ratios are increased in 2013 by a very small margin owing to the increase in liability. 

One key ratio crucial to determining the financial resources available to support the mission is the contributed income ratio margin. This ratio which is computed by dividing income from a contribution by expenses from core activities measures the extent which externally generated resources contributes to the overall financing of the organization's core activities. Though this is a major source of revenue organization should not over depend on it since it can change anytime. The organizations should focus on ways of internally raising money from their own investments. In 2012 Child’s hope had a 124% contributed income ratio which decreased to 102.8% in 2013. This shows how the organization to a very large extent depends on contribution to finance the core activities. The organization should be wary of this and should ensure that they have other sources of finance especially the ones they can control such as income from investment. 

How financial resources are used to support the mission

The nonprofit organization must know how to allocate its scarce resources between their core and support activities. There are times when an organization can concentrate on support activities i.e. reinvestment of earnings to further develop their asset base and lose sight on their core objective. Today, there are nonprofit organization (NPOs) which produce their revenue and expenditure statement divided into two classifications along the core and non-core activities to help the track how they allocate scarce resources. The two ratios crucial in analyzing how financial resources are used to support the mission are contributor’s services ratio and contribution support ratio. The contributor’s service ratio computed by dividing the NPO’s service expense by contributions and general income evaluates whether the core services of the organization are using a growing or a declining share of resources. 

In 2012, 18.07% of total revenue went towards the organization’s service expenses, leaving behind approximately 80% of the organization’s revenue to go towards accomplishing the mission. In 2013, the contributor’s service ratio slightly increased to 18.25%. Compared to Family Connect, which has a contributor’s service ratio of 62.37% and 58.13% for the year 2012 and 2013 respectively we can conclude that Child’s Hope’s financial resources are well allocated to support the mission since the bulk of its revenues are geared towards accomplishing the NPO’s mission. Approximately 80% of child’s income goes towards their core mission while Family Connection’s portion is approximately 40% of its income channeled towards accomplishing the organization’s mission. 

Efficiency and Effectiveness of Financial Resources Application to Support the Mission

This analysis is the most crucial analysis of NPO’s performances as it assesses productivity hence points out key areas that need adjustments and improvement. It involves measurement of customer satisfaction; profitability measures internal measures of efficiency, innovation, how time is used and quality of service provided. (Datar, Horngren & Foster, 2001). However, since an NPO is oriented more towards accomplishing of mission than, making profits, the analysis should focus more on the quality of assistance provided, productivity and customer or children’s satisfaction. The productivity of the NPO measures how the organization, from the execution of its core mission, has managed to retain its donors and attract even more donors. A Child’s Hope Inc’s contribution from donors i.e. grants increased by $18887 a 2.13% increase. For the same period, Family Connection increased its contribution from donors by 16.51%. From the previous analysis on how financial resources are used to support the mission, we saw that Child’s Hope was effective than Family Connection. As such the little growth in contribution reported by Child’s Hope could be as a result of the organization not marketing its self properly. The organization needs to increase their marketing activities to place themselves strategically in the society in to attract more donors. Satisfaction of children or donors is not an easy variable to measure, however, given the above measures considered we can estimate that the company has comparatively done better to see that they achieve their mission hence children’s satisfaction should be high. 

Limitations of Financial Ratio Analysis

NPOs financial statements are usually not subjected to any accounting regulation, meaning crucial adjustment due to various factors in the economy such foreign exchange volatility were not considered and as such the final figures did not represent the real situation on the ground. Also due to this challenge, comparing one organization's statement to another was also challenging since they did not share a uniform calculation and reporting style. Also, with the organization's main objective being the accomplishment of their mission, the style, and direction of change of the organizations’ activities was difficult to understand and compare. 

Conclusion

Financial analysis of A Child’s Hope Inc’s financial statement has helped reveal some of the strength and weakness of the organization. A critical strength the organization has is its use of financial resources to support the mission. Child’s Hope’s financial resources are well allocated to support the mission since the bulk of its revenues are geared towards accomplishing the NPO’s mission. Its main challenge is whether these financial resources will be sufficient to support the mission. Though the organization is operating within its means; it cannot support its mission from its internal assets for long before seeking contribution from external sources. Its main source of revenue is a contribution from grants something which is not sustainable as it can change anytime. As such more should be done to ensure that the organization increases its own capacity to raise money to support its mission. The organization also needs to market itself aggressively to position them strategically in the market to attract more donors and similar sources of finance.

References

Abraham, A (2004) A Model of Financial Performance Analysis Adapted for Nonprofit Organizations. Retrieved from http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1320&context=commpapers

Datar,S, Horngren, C & Foster, G (2001) Cost Accounting: A Managerial Emphasis . 10th Ed. Englewood Cliffs, New Jersey: Prentice-Hall International.

Keating, E & Frumkin,P (2008) How to Assess Nonprofit Financial Performance. Retrieved from http://www.nasaa-arts.org/Learning-Services/Past-Meetings/Reading-5-Understanding-Financial-Statements.pdf

Turk, F., Gallo, R., Gillman, S., Mechanick, J., Montalbano, C., Salluzzo, R., Prager, F., Cure, H & Deprospo, R. (1995). Ratio Analysis in Higher Education: Measuring Past Performance to Chart Future Direction . 3rd Edition. KPMG Peat Marwick and Prager, McCarthy & Sealy.