Financial Statement Analysis: Key Financial Ratios and Metrics for Nonprofits
Financial statement analysis reveals how well a nonprofit organization (NPO) has done in meeting its targets. Interrelated ratios reveal the financial standing and areas of financial trouble. Each ratio should be compared over the years for a trend, to an industry norm (e.g., healthcare standard ratio), and to comparable NPOs to obtain a relative standing. Ratios vary depending on the service provided, complexity of operations, funding sources, and donor restrictions. A cost-benefit analysis should be undertaken for new programs. Risk-return analysis is also essential.
When evaluating the service efforts of an NPO, look to see how much of every dollar goes to the primary mission as opposed to the fundraiser’s commissions and the executive director’s salary. Carefully monitor the relationship of supporting services to program services expenses.
Financial statement analysis is undertaken by those working within the NPO, such as managers, and outsiders evaluating the NPO’s financial statements. Financial statement users are provided with red flags as to impending financial problems that need to be identified and corrected. Areas of strength are also identified and taken further advantage of. Financial statement users include resource providers, such as contributors and grantors. They want to know how well their funds are being spent for the purposes solicited. Financial statements reveal ...