Identifying Red Flags in a Nonprofit’s Finances
Spotting potential issues in a nonprofit’s financial health can help you make informed decisions. Keep an eye out for these warning signs in financial documents and conversations:
Financial Statement Red Flags
- Declining annual revenue or net assets
- Increasing receivables or recurring operating deficits
- Consistently low reserves or frequent cash flow problems
- Heavy reliance on restricted income in the fund balance
- Limited revenue diversity
- Delayed audits (over 5–6 months after the fiscal year ends)
- Audit issues, missing documents, or gaps in financial reporting
- Altered or unclear financial documents
- Unexplained budget variances
Conversation Red Flags
- Heavy dependence on a single funder (e.g., government contracts)
- Loss of a major funder or revenue source
- Recent or prolonged absence of key leadership, such as the executive director
- Delays in providing information or a noticeable decrease in service demand
Following Up on Red Flags
While red flags don’t always indicate significant problems, they should prompt further investigation. Consider asking:
- Does the organization have the financial resources to complete the project as planned?
- If additional funding is needed, is there a plan to secure it?
- Are there any anticipated financial challenges?
- What steps are being taken to diversify funding and improve financial health?
These follow-up questions can help you better understand the nonprofit’s stability and capacity to achieve its goals.
Disclaimer: While we pride ourselves on our advice, please realize Exponent Philanthropy is not a law or accounting firm. This information contained in this Q&A is being provided for informational purposes only and not as part of an attorney-client relationship. The information is not a substitute for expert legal, tax or other professional advice tailored to your specific circumstances, and may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code. It is our advice that you seek independent counsel, for any tax, accounting or legal issues you may have, related to matters that are of a material concern to you or your organization.