Posted: June 13th, 2022
Consider the different financial analysis tools that nonprofits can use to evaluate their financial health. For this discussion, refer to the required reading in this module in Essentials of Accounting for Governmental and Not-for-Profit Organizations. Illustration 13-7, Performance Indicators, in the textbook will be particularly useful. This discussion will help you prepare for your final project as you will need to use three ratios/performance indicators to evaluate your organization’s financial health. Address these items in your post:
What are the performance indicators you are examining in your nonprofit?
What three key ratios would you use to look at those performance indicators? For each ratio, provide the formulas and explain what the ratio tells you about the performance of your nonprofit. Explain why you think those three are the most important for the organization that you have established?
Based on the results, what key decisions (e.g., cost cutting, donor campaigns) can be made?
In responding to your peers, choose posts that have not been responded to yet. Respectfully critique your peer’s rationale for the three most important key ratios for their performance indicators. What other ratios/performance indicators should your peer consider and why? Support your position, citing the text.
For my non-profit organization, I won’t keep any finished goods inventory. My nonprofit’s performance indicators include whether it can pay its current obligations, whether revenues are enough to cover expenses, and whether it uses debt or equity to finance its operations. To analyze my nonprofit’s financial health, I’ll utilize at least three ratios. I’ll use the Liquidity, Going Concern, and Capital Structure ratios.
Liquidity measures a company’s overall financial health and the quantity of current assets that can be swiftly converted to cash. Going Concern Ratio tells me if a nonprofit has the funds to continue operating for an undetermined amount of time until the firm shows signs that it no longer has the resources to operate (Kurnia, 2018). If a company is “going concern,” it’s successful and not going bankrupt; otherwise, it’s failing and going bankrupt. This reveals my nonprofit’s performance. By comparing a firm’s debt to its equity, capital structure tells me about my nonprofit’s success (Alabdullah, 2018).
As a non-profit board member, I’m interested in the liquidity ratio since it tells me how well my organization is performing in terms of short-term (current) cash availability (debts, obligations). A good Liquidity Ratio is important to my nonprofit because it evaluates how quickly a corporation can convert current assets, such as cash, into short-term debt and liabilities. “Quick” or “cash” Liquidity Ratio (Abadi et al, 2019). Concerns A high ratio is important for my non-profit because it indicates a firm will continue operations for the foreseeable future. To ensure that my nonprofit organization is managed by a responsible manager who promotes long-term equity, the capital structure is most important. Members of a nonprofit corporation’s board of directors, whether volunteers or employees, can and should pay their employees’ fringe benefits and cover the nonprofit’s utility bill balance to reduce expenses like salaries and fringe benefits. If the board cuts spending, they can reduce the nonprofit’s debt. Depending on the organization’s needs, a non-fundraising profit’s director can conduct online (virtual) or face-to-face (in-person) fundraisers. This strategy can help a nonprofit cover operating cost.
Kurnia, P., & Mella, N. F. (2018). Opini Audit Going Concern.Jurnal Riset Akuntansi dan Keuangan,6(1), 105-122.
Abadi, K., Purba, D. M., & Fauzia, Q. (2019). The Impact of Liquidity Ratio, Leverage Ratio, Company Size and Audit Quality on Going Concern Audit Opinion.Jurnal Akuntansi Trisakti,6(1), 69-82.
Alabdullah, T. T. Y., Laadjal, A., Ries, E., & Al-Asadi, Y. A. A. (2018). Board features and capital structure in emerging markets.Journal of Advanced Management Science,6(2).
The performance indicators that I am examining for my nonprofit, Found Family, Inc., include: if the organization can pay its current debts; if revenues are sufficient to cover expenses and how many months of operating expenses the unrestricted net assets can cover; if the organization relies more on debt or equity to finance operations; if the cost per output is decreasing over time; what percent of contributions remain after adjusting for the cost of raising contributions; if the costs of raising contributions are an appropriately small percentage of contributions received, and if the rate of total return on the investments is reasonable (ACC-325, 2018).
Three key ratios that can help address some of these performance indicators include the liquidity ratios, the program effectiveness ratio, and the fund-raising efficiency ratio. The formulas for these ratios are as follows (ACC-325, 2018):
· Liquidity Ratio: Current Assets (cash, A/R, inventory)/Current Liabilities
· This ratio shows the capability of the organization to cover all of its current liabilities (debt obligations due within the fiscal period) with its current assets (assets that will be in hand within the fiscal period.) This ratio is critical, because if the organization cannot cover its current obligations with the assets on hand, then it will default and incur penalties on those obligations, as well as likely carry higher interest rates on any liabilities going forward if applicable, which will cost the organization more. It can also result in cutting into the total assets of the organization, decreasing the overall value of the organization and possibly decreasing the number of donors or amount they are willing to donate. The minimum acceptable ratio value is 1, that indicates that the current assets are perfectly capable of covering the current liabilities in their entirety, but the higher the better, because that indicates more capability on the organization’s part, especially if any unexpected expenses are incurred (such as in the event of a global pandemic) that might cut into available current assets.
· Liquidity Ratio: Quick Assets (cash and A/R)/Current Liabilities
· Similar to the ratio above, but the quick assets do not include inventory because cash and accounts receivable can more quickly be turned to cash than inventory that needs to be sold.
· Program Effectiveness Ratio: (Program Expenses/Total Expenses) x 100
· This ratio shows what percentage of total expenses are allocated to programs. Because the organization’s main goal is to provide its program, the closer to 100% this percentage is, the better. There will more than likely be some general administration and management expenses that prevent it from being 100%, which is acceptable, so long as the majority of the expenses are allocated to the program. I would say that a reasonable goal would be 80%+, as that way most of the expenses are allocated to the programs that the organization promised to offer, while also being able to run and operate overall efficiently. If the percentage is lower than that, it may be indicative of poor expense allocation or perhaps administrative/management expenses being too high and in need of reworking.
· Fund-Raising Efficiency Ratio: Fund-Raising Expenses/Public Support(Contribution Revenues)
· This ratio shows the portion of contributions received that the cost of fund-raising for those contributions represents. It shows how well the organization is earning money for each dollar put towards that objective. If the ratio is 1 or higher, then the company is only earning one dollar for every dollar spent, or is actually losing money on every dollar spent, which may be indicative of a fund-raising system that is not working as designed, whether it be targeting the wrong potential donors, using services/systems that are too expensive, etc. The lower the ratio, the higher the earnings. If the ratio is 0.3, then the fund-raising expenses represent 30% of contributions, so $0.30 of each dollar, meaning that $0.70 of each dollar is an earned contribution. If the ratio is 0.03, then the organization retains $0.97 of every dollar contributed, only $0.03 going to the fund-raising expenses.
Based upon the results of the ratios, the organization will have a number of decisions to make. For instance, if the liquidity ratios show that the current/quick assets perhaps only cover a portion of the current liabilities, that would be a sign to not take on any more debt if possible for the time being, particularly short term debt due within a year period, and the organization may look at ways of increasing assets such as running a campaign to increase cash donations to have that cash on hand available for current liabilities. If the program efficiency ratio shows that a too-small percentage of total expenses are going to programs, then a restructure of total expenses may be necessary, which may include changing vendors for any software, payroll systems, physical equipment, etc., things that are a general organization expense and not necessarily specific to any program. If the fund-raising efficiency percentage is too high, then it may be worth considering running a campaign to increase donor contributions if lowering fund-raising expenses is impossible, or finding ways to cut fund-raising costs if possible, such as not outsourcing work to a person/vendor that needs to be paid if possible, maybe if fundraisers are held at off-site venues, holding them in house to not have to pay for the space, etc.
ACC-325. (2018). [VitalSource Bookshelf 10.0.1]. Retrieved from
Nonprofit organizations track performance metrics and are accessible through sources such as GuideStar, INC, the BBB Wise Giving Alliance, Charity Navigator, CharityWatch, and more. These are very useful tools for benchmarking ones own nonprofit organizations against industry averages or standards. Some of the primary financial ratios that are used include:
· Liquidity – can the organization pay its current debts? This is critical to ensure repayment of current and future obligations
· Formula: Current Assets / Current Liabilities
· Program effectiveness – Is an appropriate amount spent on accomplishing the NFP’s goals? – Ensures that, compared against industry averages, programs are receiving proper funding. Program efficiency metrics will also be useful in conjunction with effectiveness.
· Formula: Program expenses / Total expenses
· Fund-raising efficiency – Are the costs of raising contributions an appropriately small percentage of the contributions received? This can help to measure how well current fund-raising efforts are performing. If this ratio is too low, other forms of fund raising should be explored. This is critical, as fund raising is a primary source of income for most nonprofit organizations.
· Formula: fund-raising expenses / total contributions
These are the primary ratios I will be using to examine my nonprofit. If liquidity ratios are too low, the organization should release assets or increase income. If program effectiveness is too high or too low, spending can be reallocated to support other programs. If fund-raising efficiency is too low, other methods of fund-raising should be explored.
ACC-325. [[VitalSource Bookshelf version]]. Retrieved from vbk://9781307297560
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