Do you know how to evaluate the use of your nonprofit’s funds and the target ranges for these metrics? Though sound financial management may not be front and center in your nonprofit’s mission, it is essential for ensuring the integrity of its programs and services. One of the benefits of nonprofit audit services is getting a clear picture of your organization’s financial health and the cost-effectiveness of its program and services implementation, but you can get started by calculating these four fundamental financial ratios.
Your nonprofit’s current ratio is a critical metric as it tells you at any given time your organization’s ability to pay its bills. As important as it is, it is also easy to calculate: divide your current assets by your current liabilities. If your finances are where they should be, this ratio shouldn’t be less than 1:1. This ratio should also be calculated regularly in order to monitor the progress or maintenance of your organization’s financial condition.
The reserve ratio is slightly more complicated to calculate but is no less crucial to your operations. This metric tells you your nonprofit’s ability to sustain programs and services during temporary revenue and expense fluctuations. To calculate your reserve ratio, you must first know the figure for your expendable net assets. Your expendable net assets are your unrestricted or temporarily restricted net assets minus non liquid assets like property investments, equipment, or other nonexpendable components. Once you have this number, you divide it by your daily expenses (your annual expenses divided by 365). The ideal range for this ratio is between three and six months.
Percentage Spent on Program Activities
By understanding this ratio, you can get a picture of the portion of your nonprofit’s funding that goes to its core purpose: providing programs and services. To calculate this ratio, divide your total program service expenses by total organization expenses. Usually, 65% or higher is the goal of most nonprofits.
Percentage Spent on Fundraising
Calculated in the same fashion as the percentage spent on program activities, this ratio is determined by dividing total fundraising expenses by contributions. If you are conducting cost-effective fundraising efforts, the benchmark percentage is 35%.
These ratios can give you a broad view of your nonprofit’s financial health and with the help of California nonprofit audit services, you can use the insight they provide to enhance your operations and better work toward your nonprofit’s overall mission.
Ernst Wintter & Associates LLP specialize in California nonprofit audit and tax preparation services. Contact us today for help with your non-profit audit or tax prep needs.