Nonprofit and for-profit organizations share many similarities, such as analyzing key performance indicators (KPIs) to determine the level of success. One example of a KPI for a nonprofit organization is to determine whether you have reached a fundraising goal. Leveraging KPIs measures the health of your organization, which involves calculating several financial ratios
Calculating financial ratios provides you with the information required to maximize revenue, while at the same time reducing costs. The question is not should your nonprofit organization calculate financial ratios. Instead, you have to decide which financial ratios provide you with the insight you need to determine the financial status of your organization.
Analyzing the following four ratios gives your nonprofit organization a head start in determining its financial status.
Program Expense Ratio
Your nonprofit organization should have developed a core mission statement. The program expense ratio helps you discover the percentage of your nonprofit’s expenses that are devoted to its core mission. Donors consider the program expense ratio to be a strong indicator of a well-managed nonprofit organization.
Charity Navigator gives the highest ratings to nonprofits that generate a program expense ratio of at least 85%. Calculate the program expense ratio by dividing program services expenses into total expenses.
Administrative Expense Ratio
You have at least heard about the negative financial consequences of too much red tape for nonprofit organizations. The administrative expense ratio, which is calculated by dividing administrative expenses into total expenses, provides you with the data you need to manage administrative costs. Charity Navigator considers an administrative expense ratio under 15% to be a positive sign of a well-run nonprofit.
Fundraising Efficiency Ratio
Spending money wisely for each fundraiser organized by your nonprofit organization allows you to optimize financial resources. The fundraising ratio measures how much of each dollar raised for a specific event goes towards managing the fundraising event. Charity Navigator considers a fundraising efficiency ratio of no more than $0.10 for every $1 raised to be a strong indicator of a successful fundraising effort.
Calculate the fundraising expense ratio by dividing total contributions into the value of fundraising expenses.
As one of the most important financial ratios for businesses, the current ratio helps you determine the liquidity of your nonprofit organization. Your nonprofit should generate a current ratio of at least spending one dollar of assets for every one dollar of liabilities. Calculate the current ratio by dividing current assets into current liabilities.
Financial Ratios Matter
Remember that your nonprofit is unique, which means not every financial ratio makes sense to determine the success of your organization. However, the four financial ratios presented here provide you with a good start to finding ways to improve the financial health of your nonprofit. Financial ratios matter to help you identify the trends that might be negatively impacting the performance of your nonprofit organization.
At Ernst Wintter & Associates LLP, we provide comprehensive audit, review, examination and compilation services as well as tax services that fit your business needs. Our professionals have specific expertise in the financial services industry, nonprofit sector, and employee benefit plan audit requirements. Please contact us today.