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Essential Financial Benchmarks for a Not-for-Profit

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: 

  1. 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.
  2. 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.
  3. 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?

Brian Collins is an Audit Manager with over 10 years of public accounting experience. He performs audit, review, compilation, and tax services for a wide range of clients in various industries, including not-for-profits and automotive dealerships.

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