There has been a lot of talk lately about “big data.” With all of the buzz, how does one understand, at a basic level, what different financial ratios mean when assessing how a nonprofit is doing? Looking at lots of numbers is fine and dandy, but there needs to be some sort of explanation as to the numbers and what they mean. Specifically, if you’re trying to figure out how healthy your nonprofit is, you need to know what numbers make sense to your type of nonprofit. I’m a marketer and not a CFO, so sometimes the numbers seem daunting. I thought I’d break down what I’ve learned about what specific ratios mean:
- Current Ratio: Ability to pay the organizations obligations on time – shows trust and dependability
- Fundraising Efficiency: Ability to fundraise and have funder retained ( keep giving to your cause) – shows support of your mission
- Days Cash on Hand: Ability to have liquid reserves(cash) – shows company strength
- Profitability: Ability to show profit and predictable income stream ( via products or grants) – shows a strong future and allows for infrastructure changesfor growth and hope
- Reliance Source of income : Awareness of what income the organization relies on for functioning – shows dependability on others
Of course I do believe that overhead is important, but it’s not the only factor that determines the financial health of an organization. It is one factor, but it should be considered with many of the above numbers in mind as well. Furthermore, I think that an organization’s mission and goals also impact the way we look at a company’s financials. For example, if a company’s vision is to be completely financially sustainable then I would really pay attention to the ratios that show a clear revenue stream that is dependable on products and services.
Here at GuideStar we do have a product that does help you understand the health of your nonprofit. We know that many nonprofits are seeking a clear and accurate picture of their financial health in a realistic view, taking into consideration other factors other than overhead. Financial SCAN is new standard for assessing your organization’s financial health and communicating your financial story to donors, board members, and other supporters. Is so easy to use and it is very easy to understand. You can view a sample and see what you will be getting with this instant report.
How about you? How do you decipher the numbers for your nonprofit? What do you think is the most important financial metric when looking at the health of your organization?