You can spot red flags in a nonprofit’s financial statements, Form 990, or through conversation. Here’s what to look for:
Financial Statement Red Flags:
- Decline in annual revenue or net assets
- Increase in receivables or recurring operating deficits
- Trend of lower reserve balances or frequent cash flow issues
- Heavy reliance on restricted income within the fund balance
- Limited revenue diversity
- Delays in audits (more than 5-6 months post-fiscal year)
- Issues noted in audit reports, gaps in financial reporting, or missing documents
- Altered documents or unclear financial performance details
- Unexplained budget variances
Conversation Red Flags:
- Heavy reliance on a single funder (e.g., government contracts)
- Loss of a major funder or revenue source
- Recent or prolonged absence of key leadership, like the executive director
- Unusual delays in sharing information or decreased demand for services
Follow-up Questions on Red Flags:
While red flags don’t always signal major issues, they do warrant further inquiry. Here are some helpful questions:
- Does the organization have enough financial resources to complete the project as planned?
- If additional funding is needed, does the organization have a plan to raise it?
- Are there anticipated financial challenges?
- What steps are being taken to diversify funding and improve financial health?
These questions can help assess the organization’s stability and its ability to achieve goals.
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