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Posted on Mar 12, 2015

Spotlight on Monitoring the Financial Health of Your Organizaton - Statement of Activities

by Sara Kirk, Audit Manager

Are your entity's resources being used as effectively and efficiently as possible? This can be critical to those analyzing your financial statements both internally and externally. The amounts reported within the Statement of Activities provide valuable information about the sources and uses of your organization's funds.

The Statement of Activities reports an organization's revenues and expenses for a single period; and the change in net assets from the prior period. Expenses are classified between program and supporting services. Program expenses represent amounts directly incurred by the nonprofit while conducting activities that result in goods and services that fulfill the organization's mission or purpose. Supporting services include management and general expenses, which are administrative expenses not identified with a specific program but are necessary for operations such as budgeting; recordkeeping; and payroll. Supporting services also include fundraising expenses used to report the costs incurred related to seeking out potential donors or holding fundraising events. Certain expenses may require an allocation between expense classifications.

There are a few key ratios that your organization may want to review periodically that relate to data contained within the Statement of Activities. The first is the program spending ratio, which indicates the percentage of an organization's resources that are going directly to the programs advocated. The program spending ratio can be calculated by dividing program expenses into total expenses. When evaluating the calculated percentage, it is important to take into account the size, age, and mission of your organization in order to put the percentage in the proper context. Compare the program spending ratio of your organization to those with similar characteristics to see how you compare. This will prepare you to answer questions posed by potential donors.

The second ratio analysis area you may want to review periodically related to the Statement of Activities is the revenue composition of your organization. Key ratios in this area include the contributions and grants ratio and the government grants ratio. These ratios can be calculated by dividing that particular revenue source into total revenues. Organizations can use these ratios to monitor short and long-term trends and to develop strategic goals and budgets based on the results of the analysis.

Evaluating and monitoring revenue and expense related ratios internally can assist management and the board of directors in making key decisions and with benchmarking organizational performance. These financial indicators can also provide important insight into how those outside your organization may be evaluating your financial condition.

The content of these pages is for general information purposes only and does not constitute advice. Heinfeld, Meech & Co., P.C. tries to provide content that is true and accurate as of the date of writing; however, we give no assurance or warranty regarding the accuracy, timeliness, or applicability of any of the contents.