How many times have you heard, “So what’s the bottom line?” In the not-for-profit world, financial statements and financial outcomes are sometimes not easily understood by the average reader or potential donor.
In recent years there has been significant discussion related to revamping the format of audited financial statements for not-for-profits (“NFPs”) in an attempt to make them more useful to the average reader or potential donor. Whether the financial statement model changes (see ASU, Presentation of Financial Statements of Not-for-Profit Entities, Topic 958) or not, there some very useful financial performance measures that can be produced and are very convenient in measuring certain performance benchmarks of an organization. The overriding uses for financial ratios are as follows:
- Used to improve an organization’s financial decision-making process
- Helpful in summarizing and organization’s performance
- Benchmarking performances vs. similar size and geographic NFPs
- Used to identify trends
The following ratios are useful in analyzing the adequacy of the NFP’s resources:
This ratio is used to reflect how many months of operation the organization has in liquid assets. You can also break this down even further into numbers of days. (Dividing expenses by 365 vs. 12)
Average monthly or daily expenses would be calculated using your operating expenses less depreciation and amortization less in-kind expenses less unusual one-time expenses
This ratio is used to reflect how many months of operation the organization has in liquid assets, but is more conservative than the Defensive Interval since it removes restricted assets.
This ratio is used to measure the ability of an organization to add to its net assets. A value greater than one indicates an increase in net assets (savings). Is an organization adding or using up its net asset base?
This ratio measures the proportion of assets provided by debt. Values exceeding 1 could indicate future liquidity problems or reduced capacity for future borrowing.
The following ratios are useful in analyzing the composition of the NFP’s revenue:
This ratio is used to help measure the short and long-term trends in line with the strategic funding goals of an organization.
Similar to the contribution and grants ratio, organizations can use this ratio to measure the short and long term trends in line with the strategic funding goals of an organization.
The following ratios are useful in analyzing the NFP’s use of resources:
This ratio is used to help measure the relationship of funds spent for program purposes to all expense. This is one of the more highly scrutinized ratios in the industry.
This ratio is used to help measure how much the organization spends to generate $1 in charitable contributions.
The following ratios are useful in analyzing the NFP’s financial health:
This ratio represents the ability of the NFP to meet short-term obligations. Generally speaking, current ratios exceeding 1 indicates an ability to meet current obligations.
This ratio represents the aging of accounts receivable as it becomes older and collections become problematic.
This ratio represents the aging of accounts payable as it becomes older and could represent cash flow issues.
Other financial ratios:
- CEO wages as a percent of total expenses
- Personal costs as a percent of total expenses
- Benefit costs as a percent of total expenses
- Benefit costs as a percent of total compensation
- Cost per Unit of Service
- Revenues per FTE
- Expenses per FTE
- Total Compensation per FTE
- Investments as a percent of total assets
With good use of the various ratios you can expect:
- Improved information to provide to NFP organizations of all sizes and in all sub-sectors
- Baseline measures for NFPs to use in governance and administration
- More useful information in which potential donors can use in assessing your organization
Keep in mind, the ratios are not intended to be the end-all be-all of financial reporting and decision making, and the ratios are only as good as the information used to create them.
Contact Us
If you’re interested in more details about financial reporting or would like to discuss financial reporting and decision making, please contact a member of Withum’s team.
