The balance sheet is a snapshot of your organization’s assets, liabilities and net assets at a point in time. It communicates the magnitude and composition of savings, investments, fixed assets, and debts. It answers the question: How financially healthy is my organization?
A strong balance sheet provides your organization with the freedom to manage and take risks.This freedom comes primarily from having access to enough cash. Organizations need cash to:
- manage seasonal or cyclical delays between revenue coming in and bills getting paid,
- adapt to unexpected setbacks, such as the loss of a major supporter or a dip in the economy,
- pursue riskier projects or invest in organization-wide change
- take care of the facilities or other fixed assets that support their programs
While some organizations have restricted cash to put toward some of these purposes, true flexibility comes from having unrestricted funds that leadership can use at its discretion.
There are other characteristics of a strong balance sheet, such as:
Well-maintained facilities and fixed assets: Organizations with strong balance sheets do not let depreciation – an accounting estimate of the wear and tear on fixed assets – accumulate unduly over time. Rather, they periodically make repairs and replacements to fixed assets that are critical to the safety and success of their programs.
Reasonable, well-managed liabilities: Organizations with strong balance sheets borrow for strategic reasons, not to finance deficits. They make regular principal and interest payments on any bank financing, zero-out their line(s) of credit at least once a year, and pay their vendors in a timely fashion. They do not borrow from revenue earmarked for the future.
Management Tip: Set reasonable balance sheet goals for the short, medium and longer term and monitor your progress toward these goals at the management and board levels. Remember, balance sheet improvement does not happen overnight, and your organization’s needs will likely change over time, so be patient and flexible.
