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INCOME RATIOS WHAT THEY TELL US Reliance ratio Largest type of income Reliance on a type of income. Awareness of the risk ... BALANCE SHEET RATIOS WHAT THEY TELL US Current ratio Current assets An indication of the organization’s ability to pay obl... Upcoming SlideShare Loading in …5 × 1 of 3
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The Watershed Institute Follow Published on Nov 23, 2015
This handout was given to attendees at the "Communicating Financial ... Published in: Government & Nonprofit 1 Comment 1 Like Statistics Notes
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Omowunmi Taiwo , I.T Attachment at LASEPA Very useful document. Kudos! 4 months ago Reply Are you sure you want to Yes No Your message goes here
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Nonprofit Financial Ratios 1. 1. Analyzing Financial Information Using Ratios Nonprofit leaders seeking to understand their organization’s financial situation usually start by reviewing the financial reports. Understanding the financial information is the building block of any financial discussion. Beyond understanding the reports, much can be learned from analysis of the information and interpretation of what it is telling you. The basic analysis includes comparing financial reports to a benchmark such as the budget or the financial report from the previous year. One essential question is: does this information match our expectations? For a more technical financial analysis, ratios can be used to deepen understanding and interpretation. Financial ratios are an established tool for businesses and nonprofits. While there are dozens of ratios that can be calculated, most nonprofits can use a handful of them to learn more about their financial condition. This document provides a description and calculation of fourteen ratios, including a mix of income statement and balance sheet ratios. Individual nonprofits must decide for themselves which calculations are valuable. NONPROFIT FINANCIAL RATIOS Financial ratios are useful if they are: Calculated using reliable, accurate financial reports (such as an annual audit or final report)• Calculated consistently from period to period• Used in comparison to benchmarks or goals• Viewed both at a single point in time and as a trend over time• Interpreted in the context of both internal and external factors• Restricted Funds When calculating ratios from the balance sheet, be aware of temporarily or permanently restricted funds and how they might affect the ratios. Calculate the ratios using only unrestricted assets to yield the most useful results. Worksheet A spreadsheet with these calculations is available to download at www.nonprofitsassistancefund.org. Our mission is to strengthen community by investing capital and expertise in nonprofits. Find out more about Nonprofits Assistance Fund’s loans, training,resources, and financial advice tailored for nonprofits at: www.nonprofitsassistancefund.org. Copyright © 2008-2014 Nonprofits Assistance Fund 2801 21st Avenue South, Suite 210 Minneapolis, MN 55407 Tel: 612.278.7180 www.nonprofitsassistancefund.org 2. 2. INCOME RATIOS WHAT THEY TELL US Reliance ratio Largest type of income Reliance on a type of income. Awareness of the risk of a major reduction in income if this type is reduced or stopped. May be helpful for more than one type of income, including special events. Total income Reliance on government funding Total govt grants/contracts Awareness of risk in both reliance and autonomy. Government funding is often closely tied to specific contracts and budgets with limited cost allocations and flexibility. Total income Earned income ratio Total earned income Earned income as a percentage of total income. Organizations with earned income have more autonomy and flexibility. Total income Selfsufficiency ratio Total earned income The proportion of operating expenses that are covered by earned income.Total expense EXPENSE AND MANAGEMENT RATIOS WHAT THEY TELL US Personnel costs ratio Total wages, taxes, and benefit expenses Since staff cost is usually the largest part of the budget, any changes in the percentage of budget used for staff is notable.Total expenses Benefit cost ratio Total taxes, insurance, and fringe benefits Benefit costs are driven by many external factors and can increase at a different pace than other costs. Total salary and wages Admin cost ratio Total fundraising, general and admin expense Since this is a ratio that is frequently calculated by others, including donors and nonprofit watchdogs, nonprofits should be aware of their ratio and any changes over time.Total expenses Fundraising efficiency Contributed income The average dollar amount of contributions raised from each dollar spent on fundraising.Fundraising expense Cost per “unit” of service Program expense If the nonprofit uses program-based recordkeeping and has an identifiable “unit” of service, this ratio is very helpful in evaluating financial efficiency and identifying any changes over time. Units of service 2Copyright © 2008-2014 Nonprofits Assistance Fund • www.nonprofitsassistancefund.org 3. 3. BALANCE SHEET RATIOS WHAT THEY TELL US Current ratio Current assets An indication of the organization’s ability to pay obligations in a timely way (within 12 months). A useful indicator of cash flow in the near future. Current liabilities Days cash on hand Step 1: Annual expense budget – depreciation – in-kind expense – pass-through funds – unusual, one-time expenses Annual cash requirement Annual cash requirement ÷ 365 Daily cash requirement Step 2: Cash and current investments A quick test of the operating cash or adequacy of the operating reserve. Include all unrestricted cash accounts such as savings and money market accounts. Setting a target for cash accounts should take several factors into consideration, including reliability of income. Daily cash requirement Debt ratio Total liabilities How much the organization is relying on funding from others, such as loans, payables, and obligated funds. Indication of how much of a cushion there is. Total unrestricted net assets Accounts receivable aging Accounts payable > 90 days overdue As receivables get older and more delinquent, it indicates potential collection or billing problems and cash flow issues.Total accounts receivable Accounts payable aging Accounts payable > 90 days overdue An indication that the organization has cash flow problems and potentially severe financial problems. Total accounts payable 3Copyright © 2008-2014 Nonprofits Assistance Fund • www.nonprofitsassistancefund.org
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