A Financial Health Index for Achieving Nonprofit Financial Sustainability
56 Pages Posted: 1 May 2012 Last revised: 5 May 2013
Date Written: September 26, 2012
This paper offers a new approach to measuring organizational financial health based on the financial sustainability model. The objective in introducing these new financial indicators is to enable nonprofits to better manage their financial health and more confidently assure their ongoing financial sustainability. Usable measures of solvency, liquidity, and financial flexibility are introduced. Some of these measures are identical to those already in use, some are adapted from other ratios, and yet others are newly-developed. Actual data from a human services nonprofit organization are used to illustrate calculation of these measures. These measures are also placed in general, immediate-term, short-term, and medium-term classes, category scores calculated, and these category scores are combined into a numerical financial health index value (Φ). C-suite managers and board members may use this single index value to gauge their organization’s financial health relative to the next three years of operations. Managers may choose to remedy poor financial health by targeting improvement in individual measures or categories, and may choose to adopt written liquidity, debt, and investments policies consistent with those targets.
Keywords: nonprofit, finance, liquidity, financial sustainability, financial analysis
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