It should come as no surprise that keeping a close eye on the numbers is crucial to managing expenses and enhancing operating efficiency for your not-for-profit organization. To achieve these goals, it’s important to keep a close eye on the numbers and use key financial ratios to evaluate your organization’s financial health.
Let’s discuss the four key ratios that should be regularly monitored:
1. Percentage Spent on Program Activities
This ratio indicates how much of your total budget is utilized for direct services. To calculate this ratio, divide your total program service expenses by total expenses. A ratio higher than 65% is generally considered good, while 85% and above is considered excellent.
2. Percentage Spent on Fundraising
This ratio is calculated by dividing total fundraising expenses by contributions. The standard benchmark for fundraising and administrative expenses is 35%.
3. Current Ratio
This measure reflects your organization’s ability to meet its financial obligations. It provides a snapshot of your financial condition at any given time. To calculate this ratio, divide current assets by current liabilities. Generally, this ratio should not be less than 1:1.
4. Reserve Ratio
This ratio indicates if your organization can sustain its programs and services during temporary revenue and expense fluctuations. The key is to have sufficient expendable net assets.
To calculate this ratio, divide expendable net assets (unrestricted and temporarily restricted net assets less net investment in property and equipment and less any nonexpendable components) by one day’s expenses (total annual expenses divided by 365).
For most organizations, this ratio should fall between 90 and 180 days, depending on the nature of your operations, program commitments, and funding source predictability.
For example, if your non-profit relies on a few grantors and large donors to fund programming, it may be at risk if it unexpectedly loses one or two of these funding sources. In such cases, it’s prudent to maintain expendable net assets that would cover closer to 180 days’ expenses in reserve.
We understand that not every non-profit leader is fluent in accounting. To ensure you are evaluating these ratios correctly and making informed decisions based on the numbers, contact the advisors at KRD for assistance. We are here to help you navigate your organization’s specific characteristics and financial needs.
