The Analysis of Key Financial Ratios in Nonprofit Management - - PowerPoint PPT Presentation
The Analysis of Key Financial Ratios in Nonprofit Management Andrew C Holman C.P.A., Adjunct Professor (Partner-Ritz,Holman,Butala,Fine LLP) Douglas M. Ihrke, Associate Professor Nathan J. Grasse, PhD Candidate University of
Andrew C Holman C.P.A., Adjunct Professor (Partner-Ritz,Holman,Butala,Fine LLP) Douglas M. Ihrke, Associate Professor Nathan J. Grasse, PhD Candidate University of Wisconsin-Milwaukee
Increasingly important economically (10% of
GDP)
Increasing role in provision of valuable services Funded by government ($200 billion annually)
(Brooks)
Services, such as social welfare, are being
provided by nonprofits in partnership with government (Van Slyke)
Scholars have argued that nonprofits perform
important social functions better than either government or for-profit organizations (Frumkin)
Has suffered from notable scandals
NAACP United Way Adelphi University Nature Conservancy New Jersey Symphony Orchestra Milwaukee Public Museum
These influences have led to greater
scrutiny
Financial management more important
due to scrutiny and competition
Executives and Board members need
financial information to make key decisions
Nonprofit Organizations in Six Subsectors that Filed Tax Returns in 2003
Financial ratio analysis is one tool used to
improve financial decision making
Ratios use financial data to summarize
It has been easier to
get financial data averages for a car wash than the average nonprofit.
Financial analysis applicable to for profit
entities is only partially useful for nonprofits.
Profit margins mostly do not apply. Revenue streams are different Equity is much different
Nonprofit Organizations are graded or
rated but not analyzed by external sources such as Charity Navigator.
“Punitive” Ratios of Program, Management
and Fundraising. An organization should be rewarded or punished if funds are/ are not used primarily for program activities
Defensive I nterval ( DI ) :
Cash + Marketable Securities + Receivables Average Monthly Expenses Reflects how many months the organization could operate if no additional funds were received.
Liquid Funds I ndicator
LFI= Total Net Assets – Restricted Net Assets – Fixed Assets Average Monthly Expenses
The liquid funds indicator is similar to the defensive interval in its use but is more conservative in removing assets with restrictions
months of expenses that can be covered by existing assets.
Liquid Funds Am ount
LFA= Dollar Value of Unrestricted Net Assets-Net Fixed Assets + Mortgages and Other Notes Payable The liquid funds amount is a common size value that quantifies the liquid unrestricted dollar amount that an organization has available to meet current obligations.
Savings I ndicator
(SI)= Revenue – Expense Total Expense
The savings indicator measures the increase or decrease in
the ability of an organization to add to its net assets. Values greater than one indicate an increase in savings. The savings indicator is a simple way to determine if an
Debt Ratio ( DR) :
Average Total Debt Average Total Assets
Measures the proportion of assets provided by debt. High values indicate future liquidity problems or reduced capacity for future borrowing.
Contributions and Grants
CG= Revenue from Contributions and Grants Total Revenue The contributions and grants ratio measures the composition of
use this indicator to determine long and short-term trends in line with strategic funding goals that can change the organizational revenue composition in this area.
Governm ent Grants
GG= Revenue from Government Grants Total Revenue The government grants ratio measures the composition of
the contributions and grants ratio, organizations can use this ratio to determine long and short-term trends and tie strategic goals to changing the organizational revenue composition in this area.
Program Service Expense
PX= Program Service Expense Total Expense The programs service expense ratio measures the relationship of funds spent for program purposes to all expenses. This ratio has been the subject of much scrutiny including the Wise Giving Alliance of the Better Business Bureau which has set a standard of sixty five percent for this ratio.
Revenue Ratios:
Revenue Source Total Revenue Seven revenue sources are analyzed in order to establish what proportion each of these revenue streams contributes to the organization’s total
Arts, Culture, and Humanities (ACH)
Community Improvement (CI)
Human Services – Multipurpose and Other (HS)
Recreation, Sports, Leisure, and Athletics (RSLA)
Crime and Legal Related (CL)
Mental Health and Crisis Intervention (MH)
Improved information provided to
nonprofit organizations of all sizes and in all sub-sectors
Baseline measures for nonprofits to use in
governance and administration
Future research will examine differences
across sizes and sub-sectors of nonprofit
Special Thanks to the
Helen Bader Foundation For Supporting This Research Project