Financial Ratios

Operating Reserve Ratio

Your nonprofit’s operating reserves are the unrestricted funds you set aside to cover day-to-day expenses in case of an emergency. Regardless of whether a crisis is short-term (like having to pay to repair storm damage to your facility) or longer-lasting (such as an economic downturn that affects donation and grant availability for a year or more), you always need to be prepared to continue paying your bills, running essential programs, and compensating staff during it!

Your operating reserve ratio measures how long your nonprofit could cover its operating expenses with its reserve funds. It’s generally recommended that nonprofits keep 6-12 months of operating costs in reserve, so you're in good shape if your ratio is between 0.5 and 1. If it’s less than 0.5, you should consider cutting costs where it’s feasible to do so and/or make a plan to put more money in savings.

Here is the formula for calculating this ratio:

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

You’ve probably heard the saying “You have to spend money to make money,” and it rings true with nonprofit fundraising. Most of your campaigns likely involve some upfront costs, but naturally, you can’t let those exceed the amount you raise since your primary goal is to fund your mission.

Your nonprofit’s fundraising efficiency ratio shows the amount of money your fundraisers generate compared to the amount you spend to raise those funds. This provides a large-scale view of the return on investment (ROI) for your organization’s campaigns.

If your fundraising efficiency ratio is less than or equal to one, your spending on your campaigns matches or exceeds your revenue from them. In this case, you need to strategize ways to cut costs (e.g., by requesting in-kind donations of event supplies or leveraging low-cost, DIY marketing tools). If it’s greater than one, your fundraising is profitable, and the higher you can get your ratio over time, the better!

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?

Calculate

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

Your nonprofit’s annual statement of functional expenses breaks down its spending into the following three categories based on how each expenditure furthers your mission:

• Program costs are directly related to your cause and vary by vertical (e.g., spending on exhibit setup and maintenance at a museum or veterinary care at an animal shelter).
• Administrative costs include organizational management expenses like utility bills, rent or mortgage payments, insurance, and office supplies.
• Fundraising costs encompass the aforementioned upfront costs of revenue-generating campaigns, such as event planning, marketing, and fundraising software subscriptions.

Your administrative and fundraising costs combined make up your nonprofit’s overhead. While overhead isn’t inherently bad, as it’s sometimes made out to be (in fact, it’s necessary for furthering your mission, despite contributing indirectly to your cause), many stakeholders like to see that your organization is spending the majority of its funding on serving its community.

Calculating your program efficiency ratio allows your nonprofit to measure the amount that you spend on programming as compared to your total budgeted expenses. You might have heard 0.65 or 0.7 thrown out as optimal numbers, but as long as your ratio shows that the majority of your spending is program-related and increases as your organization becomes better established, you’re on the right track.

The calculation for this 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?

Calculate

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.

Working Capital Ratio

Working capital ratio (or current ratio) is a popular calculation among both nonprofit and for-profit organizations. It compares your organization’s liquid assets (cash, accounts receivable, prepaid expenses, etc.—not property or other physical possessions) and liabilities to provide a snapshot of its short-term financial health. You're in good shape if your assets exceed your liabilities, and higher numbers are generally better.

Your balance sheet provides an in-depth analysis of all assets and liabilities for the whole year, which is useful for future planning. By contrast, calculating your working capital ratio shows you whether you can cover your nonprofit’s liabilities (debt, deferred revenue, accounts payable, etc.) at any given moment with your existing liquid assets. This knowledge is helpful for creating and adjusting budgets throughout the year, especially if you have to dip into your reserve funds for any reason.

To determine your nonprofit’s working capital ratio, you can use this formula:

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?

Calculate

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.

Operating Margin Ratio

A common misconception about nonprofit finances is that because nonprofits can’t turn a profit by definition, their operating budgets have to break even every year. While this belief is grounded in fact (nonprofits can’t earn profits), what actually makes your organization a nonprofit is that it reinvests all of its funding into itself rather than paying out revenue left over after expenses to shareholders or external investors. And this reinvestment can (and should!) involve a combination of covering program and overhead costs and bolstering reserve funds.

Your organization isn’t just allowed to budget for a revenue surplus—it’s actually recommended that you do so if you can! So, your operating margin ratio (or net margin ratio) shows whether your nonprofit could produce a funding surplus given its current revenue and expenses.

With this ratio, you’re looking for positive numbers that increase over time to demonstrate good financial health. You can get a negative number from this calculation, which means your expenses exceed your revenue, and you’d either need to cut costs or add new funding streams to your strategy in that situation.

Use this formula to calculate your nonprofit’s operating margin ratio:

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

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

You’ve probably heard friends and loved ones describe themselves as “spenders” or “savers” when it comes to their financial impulses, and you might have even called yourself one of those terms to explain what you did with a bonus you earned at work or a check you got in a birthday card. This categorization applies to organizations as well as individuals, and if you want to know whether your nonprofit is a spender or a saver, there’s a financial ratio for that!

The savings indicator ratio measures your nonprofit's ability to add to its net assets by telling you whether you tend to put any overages in reserve or use them to cover imminent costs. If the result is high, your nonprofit is a saver; if it’s low, your organization is a spender (and if it’s negative, you need to reassess your financial strategy similarly to how you would if you had a negative operating margin ratio). While higher results are generally better here, your nonprofit should try to strike a healthy balance between saving and spending.

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.

Burn Rate

Even if you do everything you can to ensure your nonprofit receives funding year-round—starting a monthly giving program, hosting events during off-seasons, leveraging earned income streams, etc.—your organization will still probably bring in more donations during the year-end giving season than at any other time. So, you’ll need to make that revenue last throughout the year, especially during the fundraising dry spell many nonprofits experience during the summer.

Burn rate measures your nonprofit's monthly negative cash flows to ensure you don’t go through your resources too quickly and deplete your reserves without a good reason. A lower burn rate is generally better, although it’ll fluctuate throughout the year with the giving patterns described above.

You can calculate your nonprofit’s burn rate using this formula:

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.