You can find red flags in a nonprofit’s financial statements, Form 990, or in conversation.
Red flags in financial statements
- Decrease in annual revenue
- Decrease in net assets
- Increase in receivables
- Operating deficit, particularly if more than one year
- A trend of decreasing reserve balances
- Regular cash flow problems
- Lack of revenue diversity
- Large portion of the fund balance is restricted income
- Late audits: more than five or six months after the close of the fiscal year
- Problems mentioned in the audit notes
- Gaps in financial reporting
- Missing documents and/or failure to retain documents or electronic files consistent with the organization’s retention policies or practices
- Indications of altered documents
- Inadequate information on financial performance
- Unexplained variances from budget
Red flags in conversation
- High dependence on one funder, including government contracts
- Loss of income from one or more significant funders
- Recent change in management, particularly if there’s no executive director for a time
- Unusual delays by personnel in providing requested information
- Decreased client demand for services
Questions to ask about red flags
There are usually good explanations for the red flags you find. Ask the grantee about them, as well as about the organization’s financial well-being more generally.
- Does the organization have sufficient financial resources to deliver the project as planned?
- If the project requires other funding now or in the future, can the organization raise the money?
- Does the organization anticipate any financial issues?
- What are the organization’s plans for diversifying funding sources and strengthening the financial health of the organization?