Nonprofit Ratio Analysis
Posted on Wednesday, April 26, 2023
ShareDoes your organization use ratios to measure your financial health?
Ratios can be one way to determine your organization’s financial health. There are many different types of ratios that can be used so you need to determine which ones are most useful and applicable to your organization. By tracking specific ratios for your organization over time, you can gain a better understanding of your operations and set goals.
Here are some common ratios that can be helpful for most nonprofit organizations.
Current ratio = current assets/current liabilities
The current ratio measure the ability to pay off your short-term liabilities. This ratio should be above one, which means you have more assets than liabilities.
Cash reserves ratio = unrestricted cash/average monthly expenses (less noncash expenses)
The cash reserves ratio represents the number of months of cash you have on hand to cover your expenses. How long can you survive if you don’t receive any additional cash? Be sure to use unrestricted cash in determining the cash reserves ratio since restricted cash has been restricted by the donor to be used for a specific purpose, not operating. Best practices suggest you should have enough cash on hand to cover 3-6 months of cash.
Revenue reliance ratio = type of revenue/total revenue
The revenue reliance ratio measures how much of each type of revenue your organization receives and if the organization is relying too heavily on one source of revenue. Some organizations only receive one type of revenue, for example contributions. In situations such as this, to determine if there is actual cause for concern, you would have to go one step further and analyze the individual donors, not just the type of revenue source.
Fundraising efficiency ratio = total contributions/fundraising expenses
The fundraising efficiency ratio measures how effective the organization is in raising funds. How much money was generated in comparison to the money spent to raise it. You want to have a positive ratio, as a negative result means your organization is losing money on its fundraising activities.
Functional expense ratios
Program expense ratio = program expenses/total expenses
M&G expense ratio = M&G expenses/total expenses
Fundraising expense ratio = fundraising expenses/total expenses
The functional expense ratios determine how much of your total expenses are spent on each of the three functional areas (1) program, (2) management and general, and (3) fundraising. Ideally, you want most of your expenses to be spent on program. Most organizations that monitor nonprofits look for 75%-80% of total expenses to be spent on program. However, it is important to note that not all organizations will always fall within this guideline. New organizations that are just starting up will likely have more management and general and fundraising expenses as they begin setting up the organization and raising funds for future programming. If an organization is holding a large capital campaign, it will also likely have a larger than normal amount of fundraising expenses.
When evaluating ratios, it’s best to compare your own organization to itself year over year to determine metrics in evaluating your organization. Nonprofit industry standards can be helpful but each nonprofit organization is different – different revenue sources, different programming, different length of time in existence – all which may lead to variances in the ratio results.
Contributed by: Carrie Minnich, MAcct, CPA | Partner | DWD CPAs & Advisors
Posted in Mission Minded Nonprofits
Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.