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Cash Flow Analysis of a Non-Profit Entity

Stephanie’s question:

How do you apply the cash flow analysis rules of a business to a non-profit entity instead?

Linda’s answer:

The non-profit entities file a Form 990: Return of Organization Exempt From Income Tax. The process for calculating cash flow is similar to a business return. Here are my suggestions for the 2017 Form 990. Use this link to open a 2017 Form 990 to follow along.

Overview first

As with a business return filing a 1040 C/F, an 1120, 1120S or 1065, the first thing I want to know is what they do. Here is your overview list before you jump into the numbers:

  • Is this an initial or final return (Box B) and does that fit with your understanding of the non-profit?
  • Is the name of the organization in Box C the same as your borrowing entity?
  • Part I: Summary
    • Line 1: Read the description off the organization’s mission or most significant activities
    • Line 2: Has the organization discontinued operations?
  • Part III: Statement of Program Service Accomplishments
    • Line 1: Read more about the mission
    • Line 2 and 3: Note if there are significant changes in services from the prior year return if you are reviewing both
  • Part IV: Checklist of Required Schedules
    • Review these questions to see if they bring up other questions regarding nature of entity, foreign source income, works of art and so forth.
    • Do their answers to these questions fit with what you already understand or what you can view on their website and print materials?
  • Part VII: Officers, Directors, Trustees, key Employees, Highest Compensated Employees and Contractors
    • To the best of your knowledge, does the list and the compensation levels appear consistent with this type of organization?
  • Part XII: Financial Statements and Reporting
    • Note basis of accounting (see my note under Balance Sheets below)
    • Question 2 alerts you to the availability of compiled, reviewed or audited financial statements. Depending on your guidelines, you may wish to obtain them (I would) and be sure to read the CPA letter as well as the Notes to the Financial Statements.


Cash flow

The revenue and expenses are listed in Part I, Lines 8-18. There are supporting schedules in Part VIII for revenue and Part IX for expenses. Your cash flow worksheet might start with Line 19 Revenue less expenses (similar to net profit for a corporation). Or you might enter revenue and enter expenses separately. In either case, I’d note significant differences between the two or three year tax returns in either the revenue or expense section to better understand the organization and help determine what is recurring.

Noncash items

For determining cash flow available to service entity debt, note Part VIII, Line g. This represents noncash contributions included in Lines 1a-1f. I would subtract Part VIII Line g from total revenue for cash flow available.

Depreciation, depletion and amortization are listed on Part IX Statement of Functional Expenses. If you have started with net profit (Revenue less expenses from Part I, Line 19) or have subtracted Total Expenses (Part I, Line 18 or Part IX, column (A), Line 25) you must add back these noncash expenses. If you are entering each expense separately, either do not enter depreciation, depletion and amortization or enter them on a line in your software that will add them back.

Nonrecurring

Any revenue or expense might be nonrecurring, which is why I suggest you note significant differences between the years. Part VIII, Line 7d is Net gain or (loss) from sale of assets other than inventory. Before using it make sure it is typical for this entity.

Debt repayment capacity

Interest expense is listed on Part IX, Line 20. If you will either subtract P&I debt payments or calculate debt coverage, you must add back the interest expense from Line 20.

Balance sheet notes

The Balance Sheet will be per books and records. The revenue and expense information may be cash basis. See Part XII, Line 1. If accrual, pay close attention to changes in working capital (current assets and current liabilities) as changes in those areas can impact available cash.

Everything you know about business…and then some

In addition to the details in this post, everything you know about lending to and analyzing a business applies to a non-profit. www.LendersOnlineTraining.com modules on tax return and financial statement analysis cover the bases.

If your continuing education includes a need for a better handle on pulling cash flow from tax returns while you increase your understanding of the borrower, spot red flags and resolve them, and document your judgement calls so that even the regulators are happy, find out more by clicking here.
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About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.