Essential Financial Benchmarks for a Not-for-Profit
April 22, 2015
By Brian Collins, CPA
Increasingly, not-for-profits are playing a bigger role in our society by delivering vital services, and in our economy by providing needed jobs. With this increasing role, not-for-profits are facing intensifying scrutiny from the government (e.g., IRS and funding sources) and donors, along with increased competition. Due to these pressures, management of a not-for-profit needs to be aware of organizational performance in order to make informed financial decisions and identify trends. A way to know the performance and health of your not-for-profit is to perform analysis with financial benchmarks.
To help you measure your not-for-profit’s performance, consider these financial benchmarks suggested by The Center for Nonprofit Management:
- Quick Ratio – This ratio indicates your organization’s ability to meet short-term obligations. As a general rule, a quick ratio of 1 or more is good. Formula:
Quick Ratio = Current assets – Inventories / Current Liabilities
- Debt Ratio – This ratio indicates the proportion of debt relative to your assets. A debt ratio of more than 1 can suggest liquidity problems. Formula:
Debt Ratio = Total Debt / Total Assets
- Defensive Interval Ratio – This is a measure of the number of days your organization can operate without having to tap into long-term (fixed) assets. Most experts recommend maintaining enough cash to cover three to six months of operating expenses. Formula:
Defense Interval Ratio = (Cash / Operational Expenses) / 365
In addition, consider monitoring performance in these three key areas:
- Program Efficiency – Quantify how much your organization is spending on its primary mission vs. administrative costs using this formula: Program Service Expenses / Total Expenses. Ideally, this ratio would be at least 0.8 (80%), which reflects an appropriate level of expenses for infrastructure/administrative and fundraising.
- Operating Reliance – Determine whether or not your organization could cover all of its expenses from program revenues alone with this formula: Unrestricted Program Revenue / Total Expenses. A good outcome for this measure is 1 and, in some cases, more than 1.
- Fundraising Efficiency – Take a look at how many dollars you are able to collect for every $1 of fundraising expense by using this formula: Unrestricted Contributions / Unrestricted Fundraising Expenses. The higher the ratio, the more efficient the fundraising efforts.
So what’s the condition of your not-for-profit?