The Analysis of Key Financial Ratios in Nonprofit Management

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The Analysis of Key Financial Ratios in Nonprofit
Management

• Andrew C Holman C.P.A. Adjunct Professor
• (Partner-RitzHolmanButalaFine LLP)
• Douglas M. Ihrke Associate Professor
• Nathan J. Grasse PhD Candidate
• University of Wisconsin-Milwaukee

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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)
  

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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

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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 DOESNT 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.

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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.

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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.

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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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Ratios

• 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 organizations
  total revenues. These sources are
• Public contributions
• Government grants
• Program service revenues
• Dividends and interest
• Net sales
• Membership Dues
• 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.

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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.

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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.

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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
  

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Acknowledgements

• Special Thanks to the
• Helen Bader Foundation
• For Supporting
• This Research Project