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Audit Insight Tool: Instructions

Objective of Tool: This tool facilitates the analysis of a nonprofit organization’s audited agency-level financials. It is
designed to automatically identify areas of strength as well as areas of concern that could impact
the organization’s financial stability.

Key Inputs: Three years of audited financial statements.


Three years' management letters from the auditors.

Audience for Tool: This tool can be used by both funders of nonprofit organizations and nonprofit practitioners.

How to Use the Tool:

definitions of
the financial
Go to
Review the
ratios and

1 Definitions
trends

page...
yellow cells from Agency's

Input data into


statements
financial

2 Input data into the Go to Input


the
the

yellow cells from the page...


financial statements
financial ratios

Review the
and trends

3 Go to Output
Review the Agency's financial page...
ratios and trends

Go to
4 Input comments from the Comments on
Executive Director Output page...
into the yellow cells if applicable

© REDF 2007, Please contact REDF at info@redf.org to obtain permission before copying,
distributing or modifying this tool. This tool was created by Beth Yeap and Emily Bolton with
input from Armamino McKenna LLP
Audit Insight Tool: Definitions & Explanations
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The purpose of this page is to explain the metrics, ratios, and trends that can be used to assess an organization's
financial viability. Instruc-
Defin-itionsInput PageOutput Page
In the columns below you will see definitions and descriptions of the terms, as well as the ranges that indicate whether a tions
metric is "good", "bad" or to "approach with caution".
For example, if the percentage change in Total Assets from 2004 to 2005 is greater than zero the organization is in good
shape. If the year over year change is smaller than -20%, there is a problem that should be immediately discussed
within the organization.

You can return to this page at any point during the process to review the definitions.
( x = metric )

Green Yellow Red


Year over Year Change (YoY) Definition Why is this important?
"Good" "Caution" "Alert!"

Assets What the organization owns A significant decrease in assets, especially when
Balance Sheet

there is a negative cash flow or operating deficit, x>0 -20 < x < 0 < -20%
could signal a problem.

Liabilities What the organization owes A significant increase in liabilities could signal a
problem, unless there are liabilities associated x<0 x>0
with the organization's mission (e.g. housing).

A significant decrease in revenue could signal a


Revenue What the organization makes x > -10% -10 < x < -20 < -20%
problem.
Statement
Income

A significant increase in expenses or a dramatic


Expenses What the organization spends change in the type of expenses could signal a
problem. Especially if it is not accompanied by a x < 10% 10 < x < 20 > 20%
commensurate increase in revenue.
Negative in any given year is a bad sign as it
Flows
Cash

Cash Flow Inflow of cash - (minus) >0 <0


outflow of cash means that the organization is spending more
than it is bringing in.

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Audit Insight Tool: Definitions & Explanations
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Ratios Definition Why is this important? Green Yellow Red
"Good" "Caution" "Alert!"

Indicates an organization's financial solvency.


=Unrestricted Net Assets /
Current Ratio It's most important that the ratio's trend remains >2 1<x<2 <1
Current Liabilities
stable over time, without large changes.

Boundaries are for general guidance only, as


Debt to Unrestricted Net =Long term debt / Unrestricted
Balance Sheet

specific ratios can very depending on the < 0.5 0.5 < x < 1 >1
Assets (UNA) Net Assets
organization's industry.

A measure of organization's leverage and ability to


=Income / (Principal due on debt service debt. The lower this percentage is the
Debt Coverage >2 1<x<2 <1
+ Interest payments) greater the proportion of the agency's income
spent on debt payment.
An indicator of the proportion of agency's assets
=Unrestricted Assets / Total whose use is restricted. A higher percentage
% Unrestricted Assets > 70% 50 < x < 70 < 50%
Assets means that the organization has greater flexibility
with how it uses its assets.
A measure of fundraising effectiveness. A lower
Fundraising Exp / Listed =Fundraising Expenses / ratio indicates a more effective fundraising
< 33% > 33%
Contr Listed Contributions organization - showing that they can generate
higher income from lower fundraising costs.

=(Fundraising Expenses + If these expenses are too high it indicates that the
Overhead Expenses Administrative Expenses) / organization invests too much in overhead and too < 30% > 30%
Total Expenses little in mission related activity.
Income Statement

It's not good to have too high a percent or too low


a percent. If the percentage is too high it indicates
that the organization solely invests in programs 80 < x < 90
=Program Expenses /
Program Expenses and may not focus on building a strong 75% < x <80% or > 90% or < 70%
Total Expenses
organizational infrastructure. If it is too low the 70 < x <75
organization may not focus enough on its mission
related activities.

A smaller number indicates a higher level of


savings, which is an important component of long-
term financial sustainability. If the percentage is
Total Expenses to Total =Total Expenses /
over 100% then the organization is spending more < 100% > 100%
Revenue Total Revenue
than its income which will jeopardize the financial
sustainability of the organization over the long
term.

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Audit Insight Tool: Input Sheet
For this page you will need the organization's Audited Financial Statements including:
Management Letter from Auditors
Statements of Financial Position
Statements of Activities
Statements of Cash Flows

Because exact line items can differ from organization to organization, do your best to match
category to category and enter the items as they are listed.

If there is more than one line item under each category, enter the sum in it's respective box below.

More detailed notes can be found 'hidden' throughout the page. Allow your mouse's cursor to hover
over the red triangles to bring the notes into view.
See cell B10 "Auditor's Opinion Unqualified?" for an example.

"Management Letter from Auditors"

Fiscal Year Fiscal Year


Fiscal Year (ending in)
Auditor's Opinion Unqualified?

"Statements of Financial Position"


Assets
Current Assets: Cash and cash equivalents

Net Assets
Unrestricted
Temporarily restricted
Permanently restricted

Total Net Assets


Total Net Assets (Double Check) 0 0

Liabilities
Total Current Liabilities
Long-term Debt (Long-term liabilities)

Total Liabilities
Total Liabilities (Double Check) 0 0

"Statements of Activities"
Revenue
Grants - In-kind donations
Grants - Contributions
Grants - Individuals
Grants - Foundations
Total Grants 0 0

Government Grants or Contracts, revenue

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Audit Insight Tool: Input Sheet

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Audit Insight Tool: Input Sheet
Program Revenue - revenue from businesses 1
Program Revenue - revenue from businesses 2
Total Program Revenue 0 0

Other Revenue 1
Other Revenue 2
Other Revenue 3
Other Revenue 4
Total Other Revenue 0 0

Total Revenue
Total Revenue (Double check) 0 0

Expenses
Program Expenses

Management and General expenses

Fundraising expenses

Total Expenses
Total Expenses (Double check) 0 0

"Statements of Cash Flows"

Net Cash Flows from Operating


(or Net cash flows used by operating activities)
(Possibly a negative number)

Principal Due on Debt


Interest Payments made during the year

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GO TO:

Instruc-
Defin-itionsInput PageOutput Page
tions

Fiscal Year
Yes
No

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0

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Audit Insight Tool: Output Sheet
ACTUALS in $ Trends GO TO:

Outstanding Questions Agency Response


0 0 0 vs change vs change
Assets

Unrestricted Net Assets 0 0 0

Temp Restricted Net Assets 0 0 0

Perm Restricted Net Assets 0 0 0


Balance Sheet

TOTAL NET ASSETS 0 0 0

Cash Balance 0 0 0
Liabilities
Current Liabilities 0 0 0

Long-Term Debt 0 0 0

TOTAL LIABILITIES 0 0 0
Revenue
Grants (individ & foundation) 0 0 0

Government 0 0 0

Program Revenue 0 0 0
Income Statement

Other Revenue 0 0 0

TOTAL REVENUE 0 0 0
Expenses
Program Expenses 0 0 0

MG/Admin Expenses 0 0 0

Fundraising Expenses 0 0 0

TOTAL EXPENSES 0 0 0

Net Income 0 0 0
Flows
Cash

Net Cash Flows from operating 0 0 0

Management Letter 0 0 0

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Audit Insight Tool: Output Sheet
Auditor's Opinion Unqualified? GO TO:

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Audit Insight Tool: Output Sheet
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Ratios 0 0 0 Notes & Outstanding Questions Agency Response

Current Ratio
Balance Sheet

Debt to UNA

Debt Coverage

% Unrestricted Assets

Fundraising Exp /
Income Statement

Listed Contributions

Overhead Exp / Total Exp

Program Exp / Total Exp

Total Exp / Total Rev


Flows

Cash flow Alarm if < 0 ok ok ok


Cash

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