To help maintain compliance with the IRS’ rules for tax exempt organizations and effectively manage budgets, endowments, and other financial functions, non-profits should work with professional financial advisors. In addition, it’s important that your executives and board members regularly monitor financial ratios.

Ratios can provide valuable indicators such as early warnings of any potential overspending, inefficient cash flow management, or signs that your organization may benefit from a larger operating reserves cushion. Beyond this, carefully tracking financial ratios can also help identify any possible fraud in your organization. Here we’ll summarize four key ratios and how they can keep you apprised of your non-profit’s financial standing.

Spending Numbers

The first ratio is the percentage spent on program activities. It indicates how much of your total budget is used to provide direct services. To calculate this ratio, divide your total program service expenses by total expenses. A result higher than 65% is widely considered to be good, and 85% and above is usually excellent.

Percentage spent on fundraising is the second critical number. It represents how much you spend to raise a dollar and is a prime indicator of overall fiscal health. To calculate it, divide total fundraising expenses by contributions. The standard benchmark for fundraising and administrative expenses is 35%.

Current & Reserve Percentages

The current ratio represents your non-profit’s ability to pay its bills, providing a snapshot of financial conditions at any given time. To calculate your current ratio, divide current assets by current liabilities. Typically, this ratio should be at least 1:1.

Then there’s the reserve ratio. This tells you whether your organization is capable of sustaining programs and services during temporary revenue and expense fluctuations. To calculate your non-profit’s reserve ratio, divide expendable net assets (unrestricted and temporarily restricted net assets less net investment in property and equipment and less any nonexpendable components) by one day’s expenses (total annual expenses divided by 365). For most organizations, this number should be between 90 and 180 days. Base your target on the nature of your operations, your program commitments, and the predictability of funding sources.

Other Options

Depending on your niche and mission, there may be additional ratios your non-profit should monitor. For example, a revenue diversification ratio can tell you how much of your funding depends on a single source (no one source should provide more than 30%). Similarly, a government reliance ratio can expose a dependence on potentially insecure grants. To learn more about these and other tools for effective non-profit management, contact us.