Measures of financial health

This is a concept map of all the measures you might use to judge the financial health of a social purpose organisation, and what people might conclude because of them. It is certainly NOT a recommended menu of measures or approach. In fact, focusing on some of these measures creates perverse incentives for organisations to deliver less social value. The diagram is almost impossible to read, but if you click on the image it will take up the screen and you can make out the words, and it should be readable if you print it out as a picture on A3 paper.

measures of financial health as contributors to govt funding process

 

The financial health of third sector organisations is not a proxy for impact or effectiveness, but is of growing importance as the sector increases in size, scope and role. Its determination may begin with the analysis of financial statements, using financial ratios in context, to tell a story of operation. It should also include information on strategy, stakeholder relationships, items of value not required by financial statements, management practices, governance, mission strength and the value of volunteers and donated goods. The analysis of financial health should be conducted in a way that maximises the social objectives of the organisation under examination. I actively discourage the mechanistic use of financial ratios as a basis for financial health assessments across government and the third sector.

The map above was produced in the UK in 2009 (thanks to the National Audit Office (UK) and the London School of Economics), but a more thorough exploration of the incentives created by financial health measures can be found in the Australian translation  A User’s Guide to Australian Charity Data, published by the Centre for Social Impact in 2012.

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