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 CandidateUniversity of Wisconsin-Milwaukee

The Importance of the Nonprofit Sector 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)

Scrutiny of the Nonprofit Sector 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

Governing Nonprofits Financial management more important

due to scrutiny and competition Executives and Board members need

financial information to make key decisions

A SHORT HISTORY OF THIS PROJECT

Nonprofit Organizations in Six Subsectors that Filed Tax

Returns in 2003

Financial Ratios Financial ratio analysis is one tool used to

improve financial decision making Ratios use financial data to summarize

organizational performance

LACK OF DATA HAS CREATED CHALLENGES It has been easier to

get financial data averages for a car wash than the average nonprofit.

FOR PROFIT ANALYSIS DOESN’T FIT

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

COMMON NONPROFIT FISCAL ANALYSIS 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

Ratio – Adequacy of Resources

Defensive Interval (DI):

Cash + Marketable Securities + ReceivablesAverage Monthly Expenses

Reflects how many months the organization could operate if no additional funds were received.

Ratio – Adequacy of Resources

Liquid Funds Indicator

LFI= Total Net Assets – Restricted Net Assets – Fixed AssetsAverage Monthly Expenses

The liquid funds indicator is similar to the defensive interval in its use but is more conservative in removing assets with restrictions on them from the calculation. It also determines the number of

months of expenses that can be covered by existing assets.

Ratio – Adequacy of Resources

Liquid Funds Amount

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.

Ratio – Adequacy of Resources

Savings Indicator

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 organization is adding to or using up its net asset base.

Ratio – Adequacy of Resources

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.

RatiosRevenue 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 revenues. These sources are:

1. Public contributions2. Government grants3. Program service revenues4. Dividends and interest5. Net sales6. Membership Dues7. Special events

Ratio - Revenue Comp. of Org.

Contributions and Grants

CG= Revenue from Contributions and Grants Total Revenue

The contributions and grants ratio measures the composition of organization funds coming from these sources. Organizations can 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.

Ratio - Revenue Comp. of Org.

Government Grants

GG= Revenue from Government Grants Total Revenue

The government grants ratio measures the composition of organization funds coming from government sources. Similar to 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.

Ratio - Use of ResourcesProgram 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.

Financial Ratios Provided for the Following Subsectors 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)

Nonprofit Organizations in Milwaukee, WI (2003)

Implications 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 organizations

Acknowledgements

Special Thanks to the Helen Bader Foundation

For Supporting This Research Project