The current report is designed on the basis of the conducted analysis of the statement of activities and statement of financial position for the year 2004 for the Habitat for Humanity International. The organization’s financial statements were measured against the criteria of liquidity, long-term solvency, efficiency, diversification, and profitability. As a nonprofit organization, the Habitat for Humanity International strives to utilize its assets with maximum efficiency and liquidity to meet its long-term goals and maintain financial sustainability. The identified concerns include insufficient long-term solvency, limited diversification, and low profitability. The proposed solutions to the identified issues are the revision of budgeting, engaging in collaboration with more diverse revenue sources, matching costs and benefits, and decreasing reinvestment to ensure sustainability.
Liquidity
When analyzing the liquidity of the organization, such liquidity ratios as the current ratio and quick ratio were calculated. As per these ratios, the data demonstrated how quickly the company turns its assets into cash, and if that cash amount is sufficient to perform according to the set goals (Finkler et al., 2017). The current ratio for the Habitat for Humanity International in 2004 was calculated by current assets divided by current liabilities, which is 124,168,954/52,823,353=2.35. This indicator is considered sufficient if it reaches a minimum of 2; therefore, the organization’s current ratio is sufficient. Its particular closeness to the minimum sufficient number implies that the company has enough liquid assets to pay its obligations in the short-term, and at the same time, uses the available finances on the completion of its mission. When compared to the year 2003, when the current ratio was 2.34, one might observe the stability in maintaining a sufficient liquidity level in the nonprofit.
Long-Term Solvency
The analysis of the Habitat for Humanity International’s financial health against the criterion of long-term solvency, the ability of the organization to effectively meet its long-term obligations is diagnosed. The ratios calculated for this measure include the profit margin ratio and debt to equity ratio (Zietlow et al., 2011). Upon dividing total liabilities by total assets for 2004, the profit margin ratio indicator reached 0.42, which is a stable indicator as compared to the year 2003, when the ratio was 0.43. As for the debt to equity ratio (total liabilities/total net assets), it is 0.74 in 2004. The sufficient level of these ratios is lower than 0.4, which demonstrates that the organization performs insufficiently in terms of its long-term obligations. There is little leverage for the company to meet its long-term payment obligations. However, since the debt to equity ratio is considerably higher than the profit margin ratio, it might mean that the nonprofit needs to decrease this ratio to increase the number of assets necessary to cover debt and meet long-term goals. It might be achieved by encouraging more reinvestment of funds into the company.
Efficiency
The analysis of the Habitat for Humanity International’s efficiency, the assets to turnover ratio and days receivable ratio were calculated and interpreted. The efficiency indicators demonstrate how quickly the revenue is received by the company (Zietlow et al., 2011). The assets to turnover ratio was calculated by dividing total unrestricted revenues by average total assets. This ratio equals to 169,400,932/118,133,555=1.43, while it is commonly accepted that the measure of 1; thus, the company efficiently generates revenues. In the case of Habitat for Humanity International, the company efficiently uses the funds without accumulating extra revenues. The days receivable ratio for 2004 is calculated by dividing accounts receivable*365/unrestricted revenue. The ratio for the company in 2004 is 14.9, which indicates that the company returns its revenues efficiently and in a timely manner.
Diversification
In order to determine how diverse the revenue sources of the organization are, the common line ratios, contribution ratio, and program services expenses ratios were applied. The assets characteristics were detected by calculating specific common line ratios, which were calculated by dividing a particular revenue item by total revenue. The indicators are as follows: government grants ratio is 15,727,356/169,400,932=0.09 (or 9% of all assets), donations in-kind ratio is 914,365/169,400,932 0.005 (or 0.5% of all assets). The contribution ratio is aimed at calculating the portion of all contributions in the total assets of the organization. This indicator for the Habitat for Humanity International for 2004 reaches the point of 0.51. Finally, the program services expenses ratio is 121,562,689/161,098,607=0.75, which indicates that 75% of all assets are spent on program services, which suffices the nonprofit’s goals although it does not reach the point of 80%, which is the norm. Overall, the organization is not significantly diversified in terms of its assets. The revenue sources are limited to several entities with uneven distribution of the financial contribution from each of them. Therefore, it is advised to seek for more revenue sources to maintain sustainability and allocate more finances to program services.
Profitability
One of the important indicators of the organization’s financial health is the level of its profitability or the ability of the company to generate profit in a manner that allows for maintaining a functional state. According to Zietlow et al. (2011), revenue generation by a nonprofit organization is an inevitable and obligatory condition for a company’s successful performance in the market. This criterion was measured using the profit margin ratio and return on assets ratio. The profit margin ratio was calculated by dividing the unrestricted surplus by unrestricted revenue. For the Habitat for Humanity International in 2004, the profit margin ratio is 4,315,726/157,156,370=0.03. The return on assets was calculated by dividing the unrestricted operating surplus by total assets, which is 4,315,726/124,168,954=0.03, which is rather low and indicates that the organization spends its revenues to the maximum by serving its mission. Since the nonprofit’s profitability is low, it might be overly exposed to the uncertainties of the economy and financially incapable of overcoming inflation or covering unpredicted expenses. Despite the consistency of this finding with the overall mission of the nonprofit, it is advisable to revise the budget and engage in financially profitable activities and matching costs and benefits.
Summary
In conclusion, this report was conducted on the basis of the financial statements provided by the Habitat for Humanity International and using conventional tools for measuring the nonprofit’s financial health. Overall, the organization’s financial health is sufficient; the indicators of its high level of asset utilization and investment into the prioritized missions demonstrate the successful performance in the allocated sphere. From the point of view of money-in/money-out, the nonprofit achieves its intended goals by avoiding accumulating extra revenue and spending assets on program services. Moreover, the efficient usage of contributions for program services allows for concluding the stability in the company’s operations. However, include insufficient long-term solvency, limited diversification, and low profitability might endanger the financial sustainability of the company. These red flags might be eliminated by reconsidering budgeting strategies, finding more revenue sources, and lowering reinvestment to intensify solvency and sustainability.
References
Finkler, S. A., Smith, D. L., Calabrese, T. D., & Purtell, M. N. (2017). Financial management for public, health, and not-for-profit organizations. CQ Press.
Zietlow, J., Hankin, J. A., Seidner, A., & O’Brien, T. (2011). Financial management for nonprofit organizations: Policies and practices. John Wiley & Sons.