Nonprofit Accounting Basics

Ratios and Indicators for Small and Midsize Organizations

Selecting and calculating certain ratios and indicators, especially in trend, can tell an organization a lot about many aspects of its financial position, performance, and prospects. There is a myriad to choose from, so thinking carefully about which ratios and indicators best serve your organization’s needs is important. You may want to create a dashboard or cover sheet for your financial report packet that includes these data.

What do you need to pay most attention to?

A chief concern for many organizations is cash flow (liquidity) and the ability to pay near-term bills and long-term debt. Is net working capital positive? How many months of cash on hand do you have? How many months of expenses can be covered by your operating reserve? How many times could current assets cover current liabilities? What is your overall assets to debt ratio? Is the trend for these indicators and ratios improving year-over-year, holding constant, or getting worse? How might the trend affect decision-making regarding budgeting and growth potential?  

Another important concern might involve profitability and its outcome, sustainability. A sustainable organization must have “chronic” operating surpluses according to the Nonprofit Finance Fund. What is your surplus margin? How many years of the past five have you had operating surpluses? Perhaps you want to know what percentage of program expenses are covered by the revenue they earn so that you can tell donors how much subsidy is needed to keep programs going. Or maybe you want to understand why cash is so tight when your net assets total shows a high positive balance. What percentage of your net assets is available for operations vs. tied up in fixed assets – are you house-poor?

Other Ratios

Performance and efficiency ratios pertaining to overhead, fundraising, support, and functional expenses are commonly used but of limited value in determining the real quality of programs or management of an organization. It may be good to be aware of how you score on these, as some donors are still looking at them, but please refrain from sharing them voluntarily. Instead, promote the fundamental reality that investing in core infrastructure is imperative to maintain soundly run programs and accountable management.

Click on the types of indicators or ratios below for formulas and interpretations for selected indicators and ratios above: