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Evaluate Nonprofit Performance with Financial Ratios

Financial Ratios - Denver CPA Firm

Many nonprofits rely on financial reports to provide information about the organization’s financial vitality and as a basis to make decisions. The details can be used to gain additional insight into operations including fundraising, program expenses, and more. Financial ratios, which use the information contained within standard financial reports, can be used to evaluate a specific aspect of operations. There are dozens of financial ratios used to assess every aspect of operations. While many are designed for for-profit organizations there are also several designed for nonprofits. These include ratios that evaluate liquidity, leverage, efficiency, and profitability. Given the large number of available ratios its important to focus on those which provide the highest value. To help clients, prospects, and others, WhippleWood CPAs has summarized the key details below.

Essential Nonprofit Ratios

  • Days Cash on Hand – This ratio measures the number of days an organization can continue to pay operating expenses given the amount of cash on hand. It provides the most conservative insight into liquidity since only cash or cash equivalents are considered. It is calculated by dividing cash on hand by the sum or cooperating expenses minus noncash expenses divided by 365. An ideal score is between .5 to 1 is typically preferred.
  • Program Service Expense – This ratio evaluates an organization’s mission efficiency by determining the extent of funding that is allocated to programs versus other cost centers. Since most donors want their contributions to fund programs and not administrative expenses, this is an area that management should pay careful attention to. It is calculated by dividing program expenses into total expenses. A high score indicates the nonprofit is using a higher percentage of donations (75% or more) to maintain programs.
  • Fundraising Expense Ratio – This ratio evaluates the amount of money generated through fundraising against the money spent to raise it. It provides management with an overview of the return on investment for fundraising efforts. It is calculated by dividing total fundraising revenue/fundraising expenses. A negative result means the organization is spending more on fundraising activities than it generates. Conversely, a positive value means the opposite. Conventional thinking asserts that an organization should spend no more than 25% of its contributions on fundraising.
  • Self-Sufficiency Ratio – As the name suggests, this ratio measures the extent to which an organization can cover expenses through earned income. The greater the amount of earned income the less reliance on donations, grants, and other funding. It is most useful for those who generate income through memberships, fees, or tuition. Examples include museums, private schools, or private golf courses. It is calculated by dividing total earned income by total expenses. It is ideal to have a score of .40, but those below .10 are too low.
  • Government Reliance Ratio – This ratio measures an organization’s reliance on government funding. This is especially important when the amount of funding is declining. It is calculated by dividing government revenue by total revenue. A higher score means an organization is less likely to maintain programs with government funding. Those with high scores should review efforts to determine how revenue sources can be diversified.
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Financial ratios provide management with insight into the financial vitality of the organization. However, not every ratio will be useful for each organization, so it’s important to identify the ones that make sense for you. Using the results will make it easier to benchmark performance and identify trends. If you have questions about the information outlined above or need assistance with an accounting or tax issue, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.