It’s as true for nonprofits as it is for athletes: Measurement improves performance. To help you measure, consider these financial benchmarks suggested by The Center for Nonprofit Management:
- Quick Ratio – This ratio indicates your organization’s ability to meet short-term obligations. Formula: Current assets – Inventories / Current Liabilities. As a general rule, a quick ratio of 1 or more is good.
- Debt Ratio – This ratio indicates the proportion of debt relative to your assets. Formula: Total Debt / Total Assets. A debt ratio of more than 1 can suggest liquidity problems.
- Defensive Interval Ratio – This is a measure of the number of days your organization can operate without having to tap into long-term (fixed) assets. Formula: (Cash / Operational Expenses) / 365. Most experts recommend maintaining enough cash to cover three to six months of operating expenses.
In addition, consider monitoring performance in these three key areas:
- Program Efficiency – Quantify how much your organization is spending on its primary mission versus administrative costs using this formula: Program Service Expenses / Total Expenses. Ideally, this ratio would be at least 0.8 (80 percent), which reflects an appropriate level of expenses for infrastructure/administrative and fundraising.
- Operating Reliance – Determine whether or not your organization could cover all of its expenses from program revenues alone with this formula: Un- restricted Program Revenue / Total Expenses. A good outcome for this measure is 1 and, in some cases, more than 1.
- Fundraising Efficiency – Take a look at how many dollars you are able to collect for every $1 of fundraising expense by using this formula: Unrestricted Contributions / Unrestricted Fundraising Expenses. The higher the ratio, the more efficient the fundraising efforts.