Financial evaluation is not an exact science and involves a lot of judgment but can be a very useful tool for evaluating the financial position of your organization within your industry and key trends that can indicate future success or trouble.

Some of the most useful metrics we look at for our nonprofit clients are the following:

Program efficiency – this key ratio measures the percentage of each expense dollar that is allocated to programs.  The perfect outcome would be ratio of “1” which indicates that every dollar paid by the organization is used for programs.  Any stakeholder in the organization will perceive this as a reflection of the how well the organization is fulfilling its mission with their dollars.

Revenue Composition – this metric shows the composition of the organization’s revenue stream.  This ratio answers the question of “how many cents in program revenue is there for each dollar of revenue generated?”  It is also an indicator of how dependent is the organization on outside funding.

Operating Reliance – this metric shows the organization’s ability to pay for total expenses exclusively from program revenues.  It is an interesting measure sice program revenues can come from more predictable and consistent funding sources.  The ideal ratio for this metric is “1”.

Fundraising Efficiency – This ratio shows how much contribution revenue a nonprofit can generate from each fundraising dollar expended.   From this metric we are expecting a high number which would indicate that the organization generates a multiple of each fundraising dollar expensed.

Of course, you can also evaluate an organization using the general business ratios used in the for-profit world, such as:

  • Current Ratio
  • Quick Ratio
  • Inventory days
  • Receivable days
  • Payable days
  • Gross program margin
  • Operating margin

A thorough financial analysis should be performed at least once per year and use comparative data from at least two years.  The results should be interpreted and discussed with a financial specialist and corrective action should be identified.

Call us today so we can perform a complete financial analysis on your organization.

Posted in Nonprofit Accounting

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