Evaluating and analyzing your organization’s financial health is a key part of managing and leading. Management typically summarizes financial data for the review of governance, and for decision making and strategic planning. Using that information to understand where your organization is today—as well as where it’s been—can help you plan and position your organization for the future.
Financial ratios can help you understand the health of your nonprofit, determine organizational trends and benchmark against your peers.
Three key financial ratios
Many funding agencies, grantors and lending institutions use financial ratios when making decisions. Three key ratios that are often used are the current ratio, days of cash on hand, and net worth.
Current ratio provides information on how quickly your assets can meet current obligations. External factors can play a major role in the timing of funds being received, so keeping a handle on this ratio helps ensure that the daily obligations of the organization are met without delays and penalties.
Days of cash on hand can provide insight into how much cash is needed for a day’s worth of expenses. This calculation helps determine the reserves that management and the board feel you need to maintain operations. It can also help ensure that you are not holding a granting agency’s cash for too long, which can trigger additional regulatory requirements.
The net worth of an organization is the value of all that is owned less the value of all that is owed. Making sure you maintain a positive net worth is critical when looking for external funding, as those external parties want to make sure that your programs can be operated appropriately and that borrowings can be repaid.
Maintaining a handle on a nonprofit organization’s financial health using ratio analysis can make it easier for management and governance to use and explain the numbers, and to execute on certain strategies. Many times they provide a simplified snapshot for the decision makers without getting lost in the numbers.
Seeing the future in organizational trends
Knowing, understanding and analyzing historical trends can help strategically guide your organization through the uncertainty of tomorrow while maintaining financial stability today. History often repeats itself, and using historical trends as a guide, management can make decisions that help weather the storms of tomorrow better than those of the past. Understanding a nonprofit’s story can also shed light on how to position it for future opportunities.
Benchmarking can expose opportunities
There are a multitude of organizations similar to yours. Measuring yourself against a group of them can shed light on opportunities for improvement. If you see that you are operating below a peer group average, you can make strategic decisions to get closer to (or exceed) the benchmark. Collaboration with local peers can also be very beneficial. Most likely, other nonprofits are experiencing similar circumstances, struggles and difficult decisions. Knowing your status and brainstorming with your peers can help develop new ideas to steer your organization in the right direction.
Help is available
Navigating the ever-changing economic and regulatory environment can be difficult, but understanding your organization’s story through financial ratios can help move from the mindset of “that’s the way we’ve always done it” to maintaining the focus on meeting goals and fulfilling your mission. Your financial advisor can help you calculate current and historical ratios, and provide insight and training on how to understand and use this information to support the financial health of your organization. iBi
Kyla Greenhoe is a manager in CliftonLarsonAllen’s nonprofit practice. You can reach her at (309) 671-4500 or [email protected]. The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP to the reader. For more information, visit CLAconnect.com.