Financial Ratios

Who uses nonprofit financial ratios?

In general, nonprofits don’t keep as close an eye on their nonprofit financial ratios as they should. Often, it’s watchdog organizations like Charity Navigator that use these ratios to make sure nonprofit organizations are doing their due diligence.

However, if your organization and your accounting team can sync up about your financial ratios, you can develop goals associated with those metrics and use them to improve your organization.

Become one of the people who use financial ratios! Use the calculators in this guide to see where your nonprofit stands for these popular ratios.

Operating Reserve Ratio

Your nonprofit’s operating reserves are the portion of your unrestricted net assets set aside in the case of an emergency. Just as you likely have a savings account with a certain amount of money set aside for any personal emergencies, your nonprofit should also maintain a certain amount of money in your account as a contingency fund.

For example, many nonprofits found these reserves very important (or regretted not having them) when the COVID-19 pandemic hit in 2020.

The operating reserve ratio measures how long your nonprofit’s operating expenses would be covered just by the amount you have in your reserves.

This ratio can be measured as either a percentage or as a number of months. The calculation for this ratio is below:

Operating Reserves Ratio = Operating Reserves / Annual Expense Budget

Operating Reserve Ratio

Measures how long your reserves will cover your nonprofit’s operating expenses.

Operating Reserves* What does this mean?

Annual Expense Budget* What does this mean?

Calculate

Your Operating Reserve Ratio is:

The higher this ratio, the more your organization has on hand to cover emergency situations. The minimum recommended ratio for this is 25%, which is equivalent to three months of your expenses.

Fundraising Efficiency Ratio

Your nonprofit’s fundraising efficiency ratio shows the amount of money generated in comparison to the amount of money spent to raise it. This provides a large-scale view of the return on investment for your organization’s fundraising campaigns.

Essentially, when this nonprofit financial ratio results in the negatives, it means the organization is actually losing money during its fundraising activities. But, a positive ratio shows how profitable your fundraising is.

The fundraising efficiency ratio calculation looks like this:

Fundraising Efficiency Ratio = Total Fundraising Revenue / Fundraising Expenses

Fundraising Efficiency Ratio

Measures the efficiency of your nonprofit fundraising campaigns.

Total Fundraising Revenue* What does this mean?

Fundraising Expenses* What does this mean?

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Your Fundraising Efficiency Ratio is:

Ideally, this ratio should be greater than one for any organization. The higher your result, the more efficient your fundraising campaigns are considered to be.

Program Efficiency Ratio

Every nonprofit incurs overhead expenses to help fund and operate the organization. These expenses include things like payroll, rent, utilities, contractors, fundraising costs, and more. However, many donor prospects and watchdog organizations compare overhead and programming expenses as a shorthand for a nonprofit’s health, effectiveness, and perceived credibility.

Your program efficiency ratio allows your nonprofit to also measure the amount that you spend on programming vs your overall expenses budget.

The calculation for this nonprofit financial ratio is as follows:

Program Efficiency Ratio = Program Expenses / Total Expenses

Program Efficiency Ratio

Measures how much of your expenses are used on program costs.

Program Expenses* What does this mean?

Total Expenses* What does this mean?

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Your Program Efficiency Ratio is:

In general, you should try to keep this ratio above 75% to maintain a healthy balance for your organization and in the eyes of the public.

Nonprofit Working Capital Ratio

The working capital ratio is often used by for-profit and nonprofit organizations alike to measure the short-term financial health of the organization. You may also hear it referred to as the “current ratio.”

Essentially, this ratio compares your organization’s assets to its liabilities. It allows you to quickly see if you have enough assets to cover your liabilities as well as extra, to expand your capacity and further address your mission. This idea plays a key role in your nonprofit’s budgeting process, ensuring you have the working capital to cover your program costs.

The calculation you’ll use for the nonprofit working capital ratio is as follows:

Nonprofit Working Capital Ratio = Current Assets / Current Liabilities

Nonprofit Working Capital Ratio

Measures the short-term financial health of your organization.

Current Assets* What does this mean?

Current Liabilities* What does this mean?

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Your Nonprofit Working Capital Ratio is:

A ratio that exceeds one is good because it means the current assets exceed the liabilities at the organization. However, the higher the ratio, the healthier your organization is in the short term.

Nonprofit Operating Margin Ratio

Your nonprofit operating margin ratio measures your organization’s ability to produce a potential financial surplus. You may sometimes hear this ratio referred to as the net margin ratio.

While nonprofits are not expected to earn a profit, negative numbers in this ratio could indicate poor financial health, fundraising inefficiency, and a lack of flexibility for assuming risk to expand the organization’s services.

The calculation for the nonprofit operating margin ratio is featured below:

Nonprofit Operating Margin Ratio = (Total Revenue - Total Expenses) / Revenues

Nonprofit Operating Margin Ratio

Measures the nonprofit’s ability to produce a potential surplus.

Total Revenue* What does this mean?

Total Expenses* What does this mean?

Calculate

Your Nonprofit Operating Margin Ratio is:

If your organization is resting right around zero for this ratio, it means you may not have the financial capacity to expand at this moment. However, the higher the ratio, the more your organization can invest back into itself by expanding programming, hiring additional staff, or funding a capacity campaign.

Savings Indicator Ratio

The savings indicator ratio measures your nonprofit's ability to add to its net assets. This nonprofit financial ratio allows nonprofits to see whether they’re generally putting their financial overages in their reserve fund, or if they have a tendency to spend it.

You can measure this nonprofit financial ratio on a monthly, quarterly, or annual basis to get a better understanding of your nonprofit’s tendency to use or save money.

The calculation for your nonprofit’s savings indicator ratio is as follows:

Savings Indicator Ratio = (Total Revenue - Total Expenses) / Expenses

Savings Indicator Ratio

Measures your nonprofit’s ability to add to its net assets.

Total Revenue* What does this mean?

Total Expenses* What does this mean?

Calculate

Your Savings Indicator Ratio is:

Your nonprofit needs to save money on a regular basis to build your reserve fund in the case of emergencies (just like individuals). Therefore, it’s best and indicates better financial health if your savings indicator ratio is greater than one.

Nonprofit Burn Rate

Your nonprofit’s burn rate measures the monthly negative cash flows at your nonprofit. Often, burn rate is used by for-profit organizations just getting their start, to measure how much they’re burning through capital before they start seeing positive returns on the business.

At nonprofits, however, knowing your burn rate is essential to ensure you’re not burning through your resources too quickly and depleting your reserves. As nonprofit revenue generation tends to be highly seasonal, this is an important metric to watch. In the summer months, nonprofits tend to have a dry fundraising spell, meaning they need to rely on the funds they raised earlier, usually in more lucrative months like December.

Of course, this is a simple overview of cash flow, which is why you can take a deeper dive into your nonprofit statement of cash flows. The calculation for the nonprofit burn rate is as follows:

Nonprofit Burn Rate = (Starting Balance - Ending Balance) / # of Months

Nonprofit Burn Rate

Measures your nonprofit’s monthly negative cash flows.

Starting Balance* What does this mean?

Ending Balance* What does this mean?

Number of Months* What does this mean?

Calculate

Your Nonprofit Burn Rate is:

The ideal burn rate is as low as is reasonable for your nonprofit. While it’s not a bad thing to spend money, you don’t want to be inefficient with your spending or spend too quickly. Track your burn rate over time so that you can be sure you’re on the right track with your spending habits and not burning through cash too quickly. A negative answer indicates that your organization actually had a cash surplus during that period.