Streetsmart Financial Basics for Nonprofit Managers

Chapter 6Financial Analysis: A Few Analytical Tools

Yes, you will need a calculator for this chapter. But not just yet, and when you do, it will be pretty simple stuff. Before we get into the ratios themselves, try the simplest yet most insightful piece of financial analysis possible. Run your thumb down the asset side of the balance sheet and find the largest number. Make a mental note of it. You have just learned a tremendous amount about your organization. Because whoever controls the single largest type of asset controls the organization.

Here's why. Suppose the organization in question is a university, and the largest asset is the endowment fund (investments). Whoever controls those investments controls the university. Sure, the professors make curricula decisions, the president and the deans decide who to hire and promote, and so forth. But whoever controls the investments sets the conditions and shapes the environment in which those other players make their operational decisions. Shrink or expand the endowment and the money-generating power that goes along with it and you dramatically alter the circumstances under which those decisions are made.

Finding and learning about how the largest asset is handled also tells you something about the organization's risk profile. It sounds like a tired cliché, but it's true that your largest asset is usually your largest liability. Usually the largest asset is central to the service model the organization uses, so if something were ...