Financial Ratio

A financial ratio is a quantitative measure derived from the relationship between two or more financial statement items. Nonprofits use financial ratios to assess their fiscal health, operational efficiency, and financial sustainability. Common ratios include the current ratio, which measures liquidity; the program efficiency ratio, which shows the proportion of funds spent directly on mission-related activities; and the fundraising efficiency ratio, which evaluates how effectively fundraising dollars are spent. By analyzing these ratios, nonprofits can gain valuable insights into their budgeting, forecasting, and overall financial management. Understanding and monitoring key financial ratios helps nonprofit leaders make informed decisions, ensure accountability, and demonstrate responsible stewardship to donors and stakeholders.