Nonprofit Accounting Basics

Ratios: Profit Margin (Surplus Margin)

This calculation indicates by what percent revenues are over or under expenses. Per the Nonprofit Finance Fund, sustainable organizations have “chronic surpluses.” Surpluses indicate there is sufficient new economic revenue to cover current expenses and to allow for appropriate growth and/or a margin for error. A board may mandate a 10% surplus to be built into the operating budget to build financial flexibility and operating reserves, or to cover anticipated risks and contingencies. The basic formula for this indicator is:

               Surplus ÷ Total Revenues

Signal:  A positive number is better; constant or increasing trend is better.

Calculation:  A decision will need to be made as to whether donor-restricted revenues for future periods are to be included in the “total revenues” factor. A more conservative calculation might include only unrestricted operating income and expenses.

Caveat:  A margin that is too high may have an impact on donors’ perception of the organization’s financial need. Good communication about the organization’s intentions will create trust.