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The Analysis of Key Financial Ratios in Nonprofit Management
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Nonprofit @ bec doms

Jun 30, 2015

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Nonprofit @ bec doms
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Page 1: Nonprofit @   bec doms

The Analysis of Key Financial Ratios in

Nonprofit Management

Page 2: Nonprofit @   bec doms

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)

Page 3: Nonprofit @   bec doms

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

Page 4: Nonprofit @   bec doms

Governing Nonprofits Financial management more important

due to scrutiny and competition Executives and Board members need

financial information to make key decisions

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A SHORT HISTORY OF THIS PROJECT

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Nonprofit Organizations in Six Subsectors that Filed Tax

Returns in 2003

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Financial Ratios Financial ratio analysis is one tool used to

improve financial decision making Ratios use financial data to summarize

organizational performance

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LACK OF DATA HAS CREATED CHALLENGES

It has been easier to get financial data averages for a car wash than the average nonprofit.

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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

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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

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Ratio – Adequacy of Resources

Defensive Interval (DI):

Cash + Marketable Securities + Receivables Average Monthly Expenses

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

Page 12: Nonprofit @   bec doms

Ratio – Adequacy of Resources

Liquid Funds Indicator

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 on them from the calculation. It also determines the number of months of expenses that can

be covered by existing assets.

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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.

Page 14: Nonprofit @   bec doms

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.

Page 15: Nonprofit @   bec doms

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.

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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

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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.

Page 18: Nonprofit @   bec doms

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.

Page 19: Nonprofit @   bec doms

Ratio - Use of Resources

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.

Page 20: Nonprofit @   bec doms

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)

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Nonprofit Organizations in Milwaukee, WI (2003)

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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