Measuring Nonprofit Financial Performance
Every organization, no matter what its mission, should periodically measure how well it fulfills that mission and how effectively resources are being utilized in the process. While the specific metrics that each nonprofit adopts to assess its performance will differ, certain key ratios should be used to effectively measure overall performance, identify trends month over month and year over year, improve decision making and benchmark against similar organizations. To help our nonprofit clients, prospects and others, Barnes Dennig has provided a summary of some key ratios below.
Key Financial Ratios
- Current Ratio – A basic measure of financial fortitude, the current ratio simply divides current assets (e.g., cash reserves and investments, real estate, vehicles and equipment) by current liabilities (e.g., taxes and lease agreements). This resulting number represents the ability of the nonprofit to meet short-term obligations. Generally speaking, a current ratio exceeding one indicates an ability to meet existing obligations.
- Net Operating Ratio – This figure indicates how efficiently the organization is using its money to fund operations. To calculate net operating ratio, deduct total expenses from total income and divide the result by total income. The higher the ratio of income to expenses, the more cost efficient the organization is. Compare this data year over year to analyze the organization’s growth.
- Fundraising Efficiency Ratio – Nonprofit organizations rely extensively on fundraising through events such as galas, golf outings and raffles, which involve significant planning, marketing, staffing and logistics costs. By dividing the total amount spent on fundraising by the total amount raised, the organization can calculate whether or not they are realizing a gain on the investment in fundraising efforts. A result of less than one means that the organization gained more than it spent. Conversely, if it is greater than one, the organization spent more than it gained. To gain further insight, consider dividing total contributions by unrestricted contributions, which can be used as the organization sees fit, including for general operating expenses.
- Program Efficiency Ratio – This figure indicates how efficient an organization is at using funds for its core purpose and is determined by dividing total program expenses (money spent directly on furthering the organization’s mission) by total expenses. Essentially, donors and board members would like to see a one-to-one ratio, but it’s unrealistic for all funds to be dedicated to programs without some administrative costs.
- Operating Reliance Ratio – Nonprofits use this ratio to determine how easily they could pay expenses solely from program revenues. It is determined by dividing program revenue by total expenses. The desired result is one or greater, which would allow the nonprofit to use additional funds to expand programs or grow other areas of the organization.
- Operating Reserve Ratio – A certain amount of liquidity is expected to ensure that a nonprofit remains financially strong for periods when no additional operating revenue is available. When comparing expendable net assets (i.e., savings and the total value of everything that could be used to raise cash if necessary) to total expenses, a ratio of 25% or greater (enough for at least three months of expenses) indicates that resources are sufficient and flexible enough to support the organization’s mission without having to borrow funds.
Using the right financial metrics can provide your organization and its board and donors valuable information to help benchmark against past performance, measure advancement toward growth and profit goals and make decisions about programs and processes. If you have questions about nonprofit financial analysis or are looking for help with your annual audit or tax compliance needs, Barnes Dennig can help. For additional information, please call us at 513-241-8313 or click here to contact us. We look forward to speaking with you soon.