How is Your Nonprofit Doing?
Posted on Wednesday, October 12, 2011
Ratios are used regularly to determine profitability, liquidity, debt, and the overall financial condition of a corporation. Industry benchmarks are used to determine how the corporation is stacking up to its competitors. In the nonprofit world; however, results aren’t as straightforward and benchmarks are harder to come by.
As of 2009, there were more than 1.5 million nonprofits registered with the IRS. The National Taxonomy of Exempt Entities has classified all these nonprofits into 26 broad groups ranging from arts, culture and humanities to the environment to religion. With that many different types of nonprofits having numerous missions, it’s not hard to see why there is no such thing as an average nonprofit with an average current ratio or accounts payable aging ratio.
So why should you care about ratios in a nonprofit organization? Because ratios can be helpful in evaluating your nonprofit if used properly. Ratios are not reserved for just accountants and auditors. The Executive Director, the Chief Financial Officer, accounting staff, board members, internal auditors, external auditors, funders, and donors all should use ratios to some degree to determine the health of the organization and if it is meeting its mission. In order to use ratios effectively here are three points to keep in mind.
1. Select Reasonable Ratios. There are many different types of ratios that measure all kinds of activities. You should select the ratios that would be beneficial to your organization. If the organization has little or no debt, would a debt ratio really be any help in evaluating the organization? Don’t try to calculate every ratio you can think of. Choose a selection of ratios to use that would be reasonable indicators of your nonprofit’s performance.
2. Start at Home. The best benchmark for your nonprofit organization is itself. Look at your organization’s history. Unless there has been a major event, you should see a trend over time for the organization. How do the current year results compare with prior years’? Are they consistent? If not, did something happen that would cause the result to be skewed? You may be able to compare your organization to other organizations of similar size in the same geographic location. Be sure that the organizations you are comparing to have similar missions and programs, as well as having a similar number of years in existence. If the organizations aren’t similar, then the comparison won’t be useful.
3. Expect, Compare, Question. In order to determine if the ratio result is good or bad, an expectation has to be developed. Based on the organization’s history and the current financial and economic conditions what should the result be? Did the organization lose a major funder that would cause support to drop? Did the organization make a major building repair that would create higher than normal expenses? Once the ratio has been calculated compare it to past years’ results. Are they consistent? Is the outcome reasonable given the facts and circumstances? If not, you should question why there is an inconsistency and seek an explanation.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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