Good financial information can help your nonprofit execute its mission, which will propel your organization to flourish so you can put your nonprofit’s vision in motion.
Ratios are a tool to help you make smart financial decisions for your organization. Using the appropriate tools well will lead you to the proper strategy and can assist in improving your nonprofit’s performance. But like any tool, ratios can be misused. After all, when you have a hammer, everything looks like a nail.
Since nonprofits vary widely, there are various financial ratios to evaluate the financial aspects of an organization. Depending on the type of nonprofit, some measures are more useful than others.
Below are a few financial ratios to help you get started. Unless otherwise noted, use the same measurement of time for both the numerator and denominator for the most accurate data.
Defensive Interval (DI)
Cash
+
Marketable Securities (investments that can be cashed out now)
+
Receivables
/
Average Monthly Expenses
=
X Months Of Operation
This number reflects how many months the nonprofit could operate if no additional cash is received.
Savings Indicators
The savings indicators show you if your nonprofit puts more money away over time or if it spends more. This ratio illustrates whether your nonprofit is adding to its net assets or using them up. You can do this using monthly, quarterly, or annual numbers.
Revenue Sources
Calculate what percentage of your revenue comes from different sources. For example, if your grant revenue is $50,000 and your total revenue is $100,000, then 50% of your funding comes from grants. If your grant expires next year, will the costs associated with those grants disappear as well? Or does your nonprofit need to start focusing on generating more grant revenue?
Program Service Expenses
Program Service Expenses
/
Total Expenses
=
% Of Program Service Expenses
Program service expenses are direct expenses associated with fulfilling your mission. This ratio is widely used to scrutinize the financial stewardship of a nonprofit, so you must categorize your expenses, which is where fund accounting becomes essential.
The majority of a nonprofit’s funds should be used toward its mission (program services). The Better Business Bureau set a standard for this ratio. They say program service expenses should account for 65% or more of an organization’s total expenses.
If you were running an animal shelter, your program services may include:
- Veterinary services – $55,000
- An animal shelter – $12,000
- Contractors (vets) – $10,000
Combined, these program services add up to $77,000. If your total expenses, including program services, general, administrative, and fundraising expenses, add up to $100,000, then your program service expenses make up 77%. This would mean your program expenses are right where they should be.
Comparing Ratios With Other Nonprofits
Comparing financial ratios with similar nonprofits can give you a benchmark to know where your organization stands. GuideStar provides access to more than 1.8 million nonprofits’ Form 990s for free (with registration). They also give some good tips on when ratios are useful and how to calculate them.
Nonprofits don’t tend to find many of the ratios used in for-profit businesses meaningful. Therefore, we provided these common nonprofit ratios to give you a good place to start. But let us know if you have a helpful ratio in your sector that we did not mention here.
Stewarding funds properly will help you build trust and confidence in your community. As nonprofits become a larger part of our economy, people are scrutinizing organizations’ finances more closely. And it’s not only board members and finance committees, but potential donors, journalists, and the general public. Knowing these ratios and adhering to set standards will help you steward your nonprofit well as you further your cause.
