NonProfit Financial Statement Analysis – What to Look For

Understanding a nonprofit organization’s financial information is not only the key to determining a nonprofit’s health, but also the building block for making most financial decisions. There is much to be learned from a nonprofit’s financial statements other than whether the organization made a profit.

From the financial statements we can learn many things about a nonprofit organization, such as:

• Did the organization have enough cash inflows to cover operations or is it living off its reserves?
• How much of the funds being raised are being spent on programmatic activities?
• How heavily leveraged is the organization?
• How much did it cost the organization to raise money?
• Is there a concentration of funds that come from a specific revenue source that may be putting the organization at risk?
• Does the organization have the ability to meet its obligations?

Frequently used financial ratios that can be utilized to perform both a quantitative and qualitative analysis that are specific to nonprofit organizations are as follows:

The Defensive Interval Ratio
Cash, Receivables and Marketable Securities / Average Monthly Expense
This ratio measures the adequacy of the resources of the nonprofit organization to support its mission.

Liquidity Funds Indicator
Net Assets – Restricted Endowments – Fixed Assets – Prepaid Expenses / Average Monthly Expenses
This indicator measures how many months the organization has before it will consume its liquid assets, assuming that no additional revenue flows into the nonprofit organization.

Accounts Payable Aging Indicator
Accounts Payable / Average Monthly Expenses
This indicator tells us how many times during the course of a year the nonprofit organization is able to turnover its
accounts payable.

Fundraising Efficiency
Total Contributions (Except Government Grants) / Fundraising Expense
This ratio measures the relative cost to produce voluntary contributions from the general public.

Net Operating Ratio
Total Revenue - Total Expenses / Total Revenue
This ratio measures efficiency of the nonprofit organization in using the general support raised from the
unrestricted contributions in relation to the overall activities of the organization.

Management Expense Ratio
General and Administrative Expenses / Total Expenses
This ratio measures efficiency of the nonprofit organization in using the general support raised from the
unrestricted contributions in relation to the overall activities of the organization.

Charity Expense Ratio
Unrestricted Contributions / Total Expenses
This ratio measures the use of funds raised from the general public to total overall activities of the nonprofit
organization.

Cash Flow Return
Operating Cash Flows / Total Assets
This ratio measures the efficiency with which the nonprofit has used all the assets at its disposal to generate cash flows.

Liquidity Ratio
Cash, Receivables, Inventories and Marketable Securities / Total Liabilities
This ratio indicates the financial strength of the nonprofit organization.

Net Temporarily Restricted Asset Ratio
Temporarily Restricted Net Assets + Deferred Revenue / Cash and Cash Equivalents
This ratio indicates if the nonprofit organization is borrowing from the future or from net assets intended for future
periods.

Debt Ratio
Average Total Debt / Average Total Unrestricted Net Assets
The for-profit world calls this the debt-to-asset ratio. It is useful for nonprofit organizations that carry debt.

Unrestricted Net Asset Ratio
Unrestricted Net Assets / Total Annual Expenses
This ratio measures the amount of unrestricted, spendable net assets, in relation to the nonprofit organization’s
annual operating expense.

Fundraising Expense Ratio
Fundraising Expenses / Total Expenses
This ratio measures efficiency in fundraising activities to the total activities of the nonprofit organization.

Program Service Expense Ratio
Program Service Expenses / Total Expenses
This ratio measures efficiency in the funds spent on the nonprofit organization’s mission and the total expenses.
This is a very key ratio in the eyes of donors.

Grants-to-Expense Ratio
Grant Revenue / Total Expenses
This ratio measures the use of grant funds raised from governments, foundations and others to total overall
activities of the nonprofit organization.

Cash Flow Liquidity
Cash + Marketable Securities + Operating Cash Flows / Total Current Liabilities
This ratio measures the ability of the nonprofit organization to cover its current liabilities

Source: BDO