Using Financial and Nonfinancial Data to Calculate Key Ratios

In the first blog of this series, we learned about the primary nonprofit financial statements and what they mean. Now it’s time to take it a step further and utilize key ratios (both financial and nonfinancial) to help manage the financial health of your organization.

Why are Key Ratios Important?

• Ratios can help manage an organization’s operations, stability, and profitability
• Ratios are often great metrics to use when benchmarking against other nonprofit organizations
• Ratios can help measure progress against operational or strategic plans

Be sure to consider both financial and nonfinancial data when determining the relevant key ratios to actively monitor your nonprofit organization. Nonfinancial data can give you context behind the financial data and help support the numbers and decisions made. Tracking ratios and metrics on a consistent basis, such as monthly or quarterly, provides clarity on the goals of the organization and how well the organization is meeting its goals and delivering its mission. 

Every nonprofit is different and what makes sense for your organization to monitor may be different for other nonprofits. There are hundreds of ratios that could be relevant to your organization, but how do you determine which ones to focus on? Some questions to consider while evaluating key ratios:

1. What are your financial goals?
2. How do you measure success?
3. What are your strategic or operational goals?

Key Ratio and Metrics

Here are some key ratios and metrics that are commonly used within the nonprofit industry:

Current ratio

• Calculation: Current assets/Current liabilities
• Why it’s important: A good indicator of your organization’s ability to meet short-term financial obligations.

Operating reserve ratio

• Calculation: (Net assets without donor restrictions – fixed assets – debt related to fixed assets)/(annual expenses – depreciation and amortization)
• Why it’s important: Indicates how long an organization can continue its operations without any new cash received. Basically, how long can your liquid net assets fund operations?

Program efficiency ratio

• Calculation: Program service expenses/Total expenses
• Why it’s important: Compares total program expenses to total expenses to measure how your organization uses funding to fulfill its mission.

Revenue diversity

• Various metrics, such as:
  • Number of revenue sources
  • Percentage of revenue by each source
  • New sources versus old sources
• Why it’s important: Having multiple sources of revenue can be a strategic and operational advantage.

Staff development

• Various metrics, such as:
  • Positions filled by internal versus external individuals
  • Staff turnover rates
  • Staff efficiency rates
• Why it’s important: Staff are responsible for carrying out the mission of the organization. Understanding how to retain employees and create efficiencies is critical for furthering the mission, serving your constituents, and creating a strong workplace culture.

Be on the lookout for the next blog in this series on how to leverage these ratios. In the meantime, catch up with our latest posts on the Innovation in Nonprofit Finance Blog.

Previous Posts in the Series

Setting the Foundation to Interpret Nonprofit Financial Statements