Analysis of key financial ratios in Non profit Organizations

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