Monday, March 9, 2009

Want to know how your nonprofit is doing financially?

Have you ever wondered whether your nonprofit is financially healthy? Here are a few quick, easy ways to gain some insight into the financial situation:

  • Defensive Interval

The Defensive Interval is a ratio that will show you how long your organization could survive with its cash on hand. Organizations should have at least 90 days worth. To calculate the defensive interval:

(Cash + Marketable Securities)/(Operating Expenses/365 days)

  • Debt Ratio

This ratio will tell you if your organization is relying too much on funding from others (loans, etc). This should be .05 or less, which means you have sufficient cushion.

Total Liabilities/Total Unrestricted Assets

  • Program Expense Ratio

The program expense ratio is one that most people are familiar with, it is used to answer the question "what percentage of our donation goes towards programming?" The Charities Review Council recommends this number be higher than 70%, but the "gold" standard is considered to be above 90%. To calculate this ratio:

Program Expenses/Total Expenses

  • Working Capital Ratio

This indicates the organization's ability to pay its bills in a timely matter. This should be somewhere between 1 and 2. If it is under 1 then the organization may not be able to meet its financial obligations, if it is over 2, then the organization may need to invest more of its money. To calculate the working capital ratio:

Current Assets/Current Liabilities

To find the numbers for these calculations, you can look at an organization's annual report or audited financials. If you want to have some more fun with ratios, check out the Nonprofit Assistance Fund's ratio chart and info sheet.