How To Do Financial Analysis On A Nonprofit

Markus Shobe
Oct 7
3 min read

Money tells a story. And in a nonprofit, that story isn’t about profit—it’s about purpose. Let’s break down how to really understand what your numbers are saying, step by step, in plain language.

Step 1: Know Why You’re Doing It

Financial analysis helps you see if your nonprofit is healthy, sustainable, and using its resources wisely. You’re not just checking balances—you’re checking impact.

Ask yourself:

Are we spending money where it matters?
Can we keep running programs at this pace?
Are we ready for a slow funding season?

Think of it like a health check-up for your mission.

Step 2: Start With The Big Three 🧾

You’ll need three main reports:

Statement of Financial Position (Balance Sheet)Shows what you own (assets) and what you owe (liabilities).You’ll see your cash, equipment, grants receivable, and debts.
Statement of Activities (Income Statement)Shows your income and expenses—basically how money moves in and out. Break it into unrestricted, temporarily restricted, and permanently restricted funds.
Statement of Cash Flows Tells you if cash is moving the right way. You could have a “surplus” on paper but still be short on cash.

Step 3: Look For The Trends 🔍

One month doesn’t tell the full story. Compare your numbers over time—month to month, quarter to quarter, year to year.

Watch these:

Revenue growth – Are donations, grants, or program fees going up or down?
Expense growth – Are costs increasing faster than revenue?
Net assets – Are they growing, shrinking, or staying flat?

Trends help you spot danger early, like a grant drying up or a program costing more than it earns.

Step 4: Check The Ratios 📊

Ratios sound fancy, but they’re just quick comparisons. Here are a few easy ones:

Program Expense Ratio= Program Expenses ÷ Total Expenses. You want this high (usually 70%+). It means most money goes to your mission.
Administrative Expense Ratio= Admin Expenses ÷ Total Expenses. Shows how much you spend running the organization. Keep it balanced—not too high, not too low.
Operating Reserve Ratio= Unrestricted Net Assets ÷ Average Monthly Expenses. This shows how long you can operate if income stops. Aim for at least 3 months of reserves.
Revenue Diversity= Don’t rely on one big donor or grant. Mix of grants, donations, and earned income keeps you safe.

Step 5: Dig Into The Programs 🎯

Every program should be tracked separately. Compare each one’s:

Revenue vs. Expenses
Funding sources
Cost per person served

Ask: Is this program sustainable? Is it delivering enough impact for the cost?

Sometimes it’s hard to admit, but not every program pays for itself. That’s okay—analysis helps you adjust before it’s too late.

Step 6: Watch Your Cash Flow 💵

Cash keeps the lights on. Even if your financial statements look fine, poor cash flow can cause trouble.

Check:

Do you have enough to cover payroll next month?
When are grants actually being paid?
Are you billing and collecting on time?

Create a simple cash flow forecast—just project what’s coming in and going out for the next few months. It doesn’t need to be fancy; even Excel works great.

Step 7: Communicate The Story 🗣️

Your board, staff, and donors don’t want jargon. Tell them the story behind the numbers:

What changed?
Why did it happen?
What should we do next?

Turn your reports into conversations. That’s how you build trust and smart decisions.

Step 8: Review Regularly ⏰

Don’t wait until audit season. Review your financials monthly or at least quarterly. Make it part of your rhythm—just like checking the gas gauge on a long drive.

Step 9: Use Tools That Help 🧮

Excel, QuickBooks, or specialized nonprofit software can help automate reports and track grants. If you work with someone like Revamp Your Finances, we can help you set up dashboards that show where your money’s going in real time.