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Analysis of key financial ratios in Non profit Organizations

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					The Analysis of Key Financial Ratios in Nonprofit Management
Andrew C Holman C.P.A., Adjunct Professor (Partner-Ritz,Holman,Butala,Fine LLP) Douglas M. Ihrke, Associate Professor Nathan J. Grasse, PhD Candidate University of Wisconsin-Milwaukee

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)

Scrutiny of the Nonprofit Sector
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Has suffered from notable scandals
     

NAACP United Way Adelphi University Nature Conservancy New Jersey Symphony Orchestra Milwaukee Public Museum

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These influences have led to greater scrutiny

Governing Nonprofits
Financial management more important due to scrutiny and competition  Executives and Board members need financial information to make key decisions


A SHORT HISTORY OF THIS PROJECT

Nonprofit Organizations in Six Subsectors that Filed Tax Returns in 2003

Financial Ratios
Financial ratio analysis is one tool used to improve financial decision making  Ratios use financial data to summarize organizational performance


LACK OF DATA HAS CREATED CHALLENGES


It has been easier to get financial data averages for a car wash than the average nonprofit.

FOR PROFIT ANALYSIS DOESN’T 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


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


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.

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.

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.

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.

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.

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 organization’s total revenues. These sources are:
1. 2.

3.
4. 5.

6.
7.

Public contributions Government grants Program service revenues Dividends and interest Net sales Membership Dues Special events

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.

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 .

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.

Financial Ratios Provided for the Following Subsectors
  

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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)

Nonprofit Organizations in Milwaukee, WI (2003)

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


				
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