As discussed in a previous article, Why are Financial Ratios Important, there is a wealth of information that can be obtained through ratios. For a nonprofit organization, these ratios can reveal key information about an organization’s performance and financial wellness not only to senior management and the board of directors, but also donors, grantors, and the general public.
While these ratios can vary significantly between nonprofit organizations based on their sector, revenue streams, timing of expenses, and overall financial health, when taken in context, the use of ratios can be a valuable tool when comparing:
- Organizations of similar size and age, that are located in the same area or similar locales, and that have similar missions or programs.
- When tracking an individual nonprofit’s progress over time.
To help clients, prospective clients, and others understand which ratios to use and their value, Selden Fox is providing the following summary of some of the most common financial ratios used by nonprofit organizations.
|Organizational financial health and vitality based on an ability to pay short-term financial obligations with available assets.||Current assets divided by current liabilities||1.0 – 2.0|
(to maintain a level of safety)
|How well an organization can meet its short-term financial obligations. This ratio is often used by banks and other creditors in making lending decisions.||Current assets excluding any inventory and prepaid expenses divided by current liabilities||1.0|
|Operating Reserve||Whether there are sufficient resources to support an organization and maintain its current operations and programming without having to borrow capital, assuming no additional revenue is generated.||Operating reserves or expendable net assets divided by annual expenses||25%|
|How effective an organization is at generating a surplus which can be used later if needed. This ratio may be helpful in forecasting.||Net results of operations (revenues less expenses) divided by operating revenues||25%|
|Program Efficiency||How effective funds are used for the programs of an organization in fulfilling its mission.||Program costs excluding any special projects and pass through costs divided by total expenses||Varies, however some guidance suggests a minimum of 66%|
|Fundraising Efficiency||How effective fundraising activities are based on the expenses required to raise contribution and event revenue.||Contribution and/or event revenue divided by fundraising expenses||Varies, however some guidance suggests a minimum of 4.0|
If you have questions about financial ratios, or need assistance with an audit, tax or accounting issue, Selden Fox can help. For additional information, please call us at 630.954.1400, or click here to contact us. We look forward to speaking with you soon.