“So how are we doing?” A common question from management and governance of nonprofit organizations.
Here are a few financial indicators for a clearer understanding of the financial health and performance of your organization.
Operating Reserve
How much do we have for the lean times? Ample reserves are often discussed and often harder to make a reality, but it helps to start with a definition. Once we have identified how we calculate our nonprofit’s current reserve, it begins to become clearer where we are relative to our determined goals.
LUNA (liquid unrestricted net assets) is a clear measure of reserves that can be applied to all nonprofits and it can be calculated with inputs from most standard financial statements. This reserve balance can be calculated as follows:
Total Net Assets
– Restricted net assets
– Property, land and equipment
+ Debt secured by property or equipment
– Any other long term assets
= Liquid Unrestricted Net Assets (LUNA)
LUNA can be compared with budgeted or prior year expenses for an understanding of sufficiency of the current reserve.
Ratio Analysis
There are a few ratios that help support a further understanding of liquidity and reserves. Two of these are the current ratio and days cash on hand.
The current ratio is an easy financial analysis tool. To calculate, we need to know the current assets and the current liabilities at a given date. Current is a period of one year into the future.
Total current assets ÷ Total current liabilities = Current Ratio
The ratio describes how many dollars we have for every dollar we owe. Calculating throughout a fiscal period is a good way to monitor basic financial health.
Days cash on hand calculates how many days we could operate with the current cash on hand. Cash divided by the daily cash requirement gets us the estimated number of days cash on hand will last.
Annual budgeted operating expenses
– Unusual, special project and pass-through costs
– Non-cash expenses (depreciation…)
= Total cash requirement
Total cash requirement ÷ 365 = Daily cash requirement
Total Cash ÷ Daily cash requirement = Days cash on hand
Functional Expenses and Performance
Functional expenses describe the purpose for which those funds were spent; as opposed to the nature of the expense (personnel, travel, rent…). There can be a lot of utility to functional expense reporting. Accuracy and precision are required in functional expense recording and reporting to support the answers to many of our questions about nonprofit performance.
Program efficiency is the total of program costs over total expenses. It also presents how much of each dollar spent goes for the programmatic mission of the nonprofit. Special projects and pass-through costs can cloud the picture of the program efficiency of core operations. It may make sense to exclude those costs to focus on core operations for making management decisions.
Fundraising efficiency can be calculated with total contributions and total fundraising costs. Depending on the equation, this ratio is presented as dollars spent per dollar raised or the inverse, dollars raised per dollar spent on fundraising.
Comparables to other organizations and industry standards are helpful in evaluating the results. Absent having industry specific benchmarks to compare to, nonprofits may find it useful to compare current to historical calculation for these key financial indicators of health and performance.
